I founded an automated investing service that manages over $3 billion, and here are the 11 best pieces of financial advice I can give you (2024)

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1. Start with your goals

When you invest, avoid blindly putting money into the market; instead, think about what you want to accomplish in the future in terms of specific goals.

These are things like retirement, a home down payment, your child’s education, making your money last your lifetime, or simply building wealth for the long term.

By having clear, concrete goals, you can put together a properly risk-managed investment plan, which can increase the likelihood that you’ll reach your goals.

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2. Make sure your portfolios are taking on the right level of risk

It’s important for your portfolio to take on the right level of risk for your goal’s time horizon because it will increase your chance of reaching your goal.

For example, if you have a 30-year retirement goal, then it generally makes sense to invest in a 90% stock/10% bond portfolio.

This higher-risk portfolio is designed to return more over this long time period, even though it may have ups and downs along the way.

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3. Use low-cost ETFs

Invest in exchange-traded funds (ETFs) with low expense ratios that let you keep more of what you earn. Over time, high fees can significantly erode portfolio returns. In fact, the Council of Economic Advisers estimates that unnecessary fees drain $17 billion a year from IRA investors’ accounts.

For individual investors who want to build a portfolio, basic stock and bond index ETFs tend to be cheaper than the average mutual fund in the same asset class, and lower minimum investments.

Consider the price difference between Vanguard’s Total Stock Market ETF (VTI) and equivalent mutual fund (VTSMX). They both follow the same CRSP US Total Market Index, but there is a significant cost difference. VTI has an expense ratio of 0.05% and VTSMX has an expense ratio of 0.17%, according to Morningstar. You can invest in VTSAX, which costs 0.05%, but only if you invest a minimum of $10,000 in that fund alone.

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4. Diversify

Markets are generally expected to go up over time, but because no one can predict when each type of company, industry, or country will go up or down, it's a best practice to own all of them at once.

This helps by avoiding specific bets while ensuring you participate in the ever-increasing value economies deliver to the world. Owning all these types of assets also helps smooth out your overall performance, because the different types are less likely to move together.

Always avoid common biases like the tendency we have to “own what we know,” such as only your own company or stocks from your own country.

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5. Rebalance

Once you’ve figured out an appropriate asset allocation for your goals and risk tolerance, rebalance your portfolio regularly. If a booming market has swollen your stock holdings, trim them back until they’re in line with your original allocation. A balanced portfolio is essential to maintaining the right level of risk and helping your goals stay on track.

6. Don’t try to time the market

Accurately predicting a market top or bottom is so rare that the financial press virtually deifies the people who occasionally do it. Jumping in and out of the market in an effort to capture gains or avoid losses actually costs investors money over the long term. The best way to reach your financial goals is to stay invested through market cycles and stick to your asset allocation.

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7. Be tax-efficient

First, use tax-advantaged accounts such as IRAs and 401(k)s first to shelter your gains from taxes.

Second, use tax-efficient investments like ETFs, which, unlike mutual funds, tend to not pass on surprise taxes to you at the end of the year.

Finally, scan your portfolio regularly — or have an automated investing service do it for you — for securities that have depreciated, and then “harvest” the loss by selling them and replacing them with similar securities. This can reduce your tax bill while keeping your asset allocation on target.

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8. Take advantage of your 401(k)

If your employer offers a 401(k) plan, start contributing as soon as you’re eligible, and save as much as you can afford.

Don’t settle for saving 3% of your salary if your employer will partially or wholly match contributions up to 6% — that’s like throwing away free money.

Choose low-cost funds, so you’re paying no more than 1% in expenses, and try to bump up your savings rate whenever you get a raise.

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9. Consolidate retirement accounts

Many people have a few different old 401(k) and IRA accounts lying around. If this is the case, consider rolling them over into one IRA. Combining them is more efficient, because you can cut down on account administration fees and paperwork.

Most importantly, you can create a single, coherent investment strategy for all your savings. You pay no taxes or penalties when rolling money over from one qualified retirement account into another, and it’s a simple process that your new custodian will often facilitate.

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10. Consider funding an IRA

Even if you have a 401(k), it may make sense to open an IRA, as well. If you currently have a 401(k), and your employer matches your contributions, it always makes sense to contribute enough to get your full employer match. Once you’ve exhausted your match, whether or not you should contribute additional savings to the 401(k) or use an IRA instead depends on the plan fees and your income.

For 2015, you can contribute up to $5,500 in a traditional or Roth IRA ($6,500 if you’re 50 or older). You can save money in an IRA while also participating in a 401(k) plan — although whether those contributions are tax-deductible will depend on your income level and other factors. Note that the earlier in the calendar year you make your deposit, the more time the money has to grow. So don’t wait until April 15.

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11. Automate as much as possible

Use technology to your advantage. Save time by putting regular investments, dividend re-investments, and rebalancing on auto-pilot.

Because technology is free of emotion, use it to keep you from engaging in bad investor behavior, such as selling at the wrong time or forgetting to make your IRA contributions.

If you automate your investments, you won’t need willpower to stay on track, and you won’t worry about normal, expected market ups and downs.

Jon Stein is the CEO and founder of Betterment. Passionate about making life better, and with his experience from his career of advising banks and brokers on risk and products, he founded Betterment in 2008. Jon is a graduate of Harvard University and Columbia Business School, and he holds Series 7, 24, 63, and is a CFA charterholder.