MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.
This is a minisode which is what we call short episodes that don’t have a guest.
The topic is advice for new investors. While these ideas are geared toward the beginner, even if you're experienced, you still might find some valuable tips and reminders.
Because like many things in life—foundational concepts are crucial to success. To be clear, this is not a trading-oriented episode. It's not about our best ideas for investing right now during global turmoil. These are evergreen ideas that make sense in virtually all situations.
Good idea number one is: Be an early-bird investor.
You might hear this and think, "Of course that makes sense. Start as soon as you can and you have more time to save." Fair enough, but people underestimate this idea because of something called exponential growth bias.
Let me give you an example. If you ask someone if they'd rather have a million dollars one month from now or one penny that doubles in value every day for a month, most people think that the million dollars is the better option. But the right answer is the penny. Because you would have $5.4 million at the end of 30 days.
Since the mid-1970s, in many countries, there have been many studies that show how most people underestimate the power of compounding. One field experiment in China found that retirees didn't understand compound interest. But once they were taught about it, their contributions to their retirement accounts increased by roughly 40%.[1]
In another example, a financial firm in the UK asked a representative sample of adults in about compounding. They told the respondents to "imagine you invested 100 pounds on an infant's behalf in the stock market. The average annual return is 8%. How much would you have when the baby is 18?[2]" People could choose from among seven multiple-choice answers. Only 6.6% of the respondents got it right which isn’t surprising, but 76.4% — underestimated the correct amount.
For those of you who underestimate the power of compounding, this is great news. Your nest eggs will grow more than you expected. The bad news is, compound interest also applies to debt when you borrow. With certain kinds of debt, compounding will work against you. The interest will pile up the same way the savings builds up for savers. Thanks to exponential growth bias, we have a tendency to save too little and borrow too much because we don’t understand the magnitude of compounding.
The good news is that there’s evidence that investors are starting to get the message. We did a survey[3] in 2024 of 1,000 Americans between the ages of 21 and 75. It found that older generations explicitly attribute better investing outcomes to earlier investing and time in the market.[4]
The better news is that the message has trickled down to younger generations. For example, baby boomers reported investing starting at age 35. But members of Gen Z started to invest at age 19. That's great news for future investors, assuming this trend continues. To sum up this point, the "good idea" here is, start investing as soon as you can.
The next good idea is to manage your risk through diversification.
Before you hit fast forward on your phone, I acknowledge that this is exceedingly standard piece of advice, but we observe many people who think they’re diversified when, in fact, they aren’t. I think part of the problem is that people don’t appreciate that diversification is like an onion. There are many layers.
The first layer is really simplistic. It’s kind of like not putting all your eggs in one basket. Let's say you own one stock. If you buy another stock in the same industry, you’ve diversified a little, but not too much.
You can diversify in a more effective fashion by buying several stocks all in different sectors. For example, Communication Services, Energy, Health Care, Real Estate, Industrials, and Information Technology. Let's say the Real Estate sector is booming, but the Industrials sector is not doing well. If you hold stocks in both of those sectors, you might not make a fortune in the short term, but you’re less likely to lose a fortune in the short term, either.
There are other ways to diversify. For example, you can invest in different-sized companies. Or in both domestic and international companies. An easy way to diversify is with exchange-traded funds – or ETFs – and mutual funds. These vehicles tend to hold large numbers of stocks.
Peeling yet another layer, you can branch out. Don't own just stocks. Buy bonds, and other asset classes to lessen your risk. With a bond, when you buy one, you are loaning your money to the bond issuer. The issuer could be the federal government, a municipality, or a corporation. The loan is for a set period of time that you typically know when you buy the bond. The bond issuer will pay you back with interest. Bonds generally create less long-term growth than stocks, but they are usually less volatile depending on the bond.
Of course there are lots of ways to diversify, but these diversification strategies are all about managing risk. You can select asset classes based on your goals, how much risk you can tolerate, and your time horizon. The mix of asset classes will change over time because your goals will shift somewhat over time.
Bottom line, investing involves risk. Some investments are very risky, and some are less risky. The important thing is to not be afraid of risk and to manage it. Don't let risk manage you. Diversification will help you do that.
Good idea number three is: Watch your fees.
Fees are often a necessary part of investing. If you have a financial advisor, it's not uncommon to pay them an annual fee. But a small difference in fees, even a fraction of a percent, can erode your returns over time.
For example, let's say you invest $1,000 when you're 25. The rate of return is 6% each year. By the time you're 65, the amount you pay in fees will make a big difference in how much money you'll actually have. If you pay no fee, that thousand dollars will be about $10,300. If you pay a half of a percent fee, that’s 0.5% you'll have about $8,400. If you pay a 1 percent fee, you'll have about $6,900. And if you pay a 2 percent fee, you'll only have about $4,600. Those are pretty big differences even though the differences in the percentages don't sound like much.
Let me be clear. I don’t think fees are inherently bad. Some things are absolutely worth paying for. Just make sure you’re getting your money's worth. If you’re paying for advice, make sure you're getting good advice.
Also, there are many types of fees. An advisory fee is different from a fee charged by a fund company that you pay when you own one of their funds. The same thing I said before applies to funds. Make sure you understand the fees that the company is charging you and that the firm is delivering performance that justifies the fee.
Finally, it's smart to review your fees every year as part of your portfolio review.
Good idea number four is "stay invested."
Another bias crops up here. The "recency” bias. Recency bias is our tendency to look at the recent past and assume those conditions will extend far into the future. This means when the market drops, we want to get out of the market and stick our money in cash.
But timing the market – getting out at the right time and getting back in at the right time – is practically impossible. Still, some investors can't resist the urge to sell when the market is dropping and they're losing money. Then try to jump back in at the perfect time and ride the wave back up. Hardly anyone can do this well.
Let's look at a historical example. On October 19, 1987, the market dropped 22% in the "Black Monday" crash. If you had sold that day to "wait for things to settle," you would have missed the recovery that started almost immediately. Most of the best days in market history happen within weeks of the worst days. If you aren't there for the bad days, you won't be there for the good ones in all likelihood.
Let's face it, you can always find a reason not to invest. If you wait for the "all clear," for everything to be perfect, you'll never invest. Throughout history, there's been the Great Depression, the Great Recession, Black Monday, the dot-com bubble crash.
After each one of these major events, the US stock market has always bounced back eventually. Keep that in mind. Don't wait for a perfect time to invest. The more time you have in the market, by and large the better off you'll be.
This brings us to good idea five, which is "know your accounts."
There are all kinds of accounts in the investing world. They serve different purposes, depending on your financial goals. They have different rules. Some you can dip into whenever you want, others you can't. Some come with penalties if you make a withdrawal. And different accounts have different tax implications.
The point is, not all accounts are the same, and it's important for you to know the differences. And make sure that you’re consciously selecting your accounts. You need to know what accounts you have, why you have them, and what the rules are. And when your goals change, as they might as you go through life, be willing to alter your accounts as needed.
And now we're at good idea number six, which is "be a life-long saver."
Make saving an ongoing part of your strategy. In other words, don’t just think of saving as something you do when you’re young. You need to keep at throughout your lifetime. Some people contribute a set amount each year to their portfolios. And that's all well and good. But a better option is to deposit a percentage of your income. That way, when you get a raise, your contribution to your portfolio will increase, too.
Best of all, it's relatively painless. Because this approach doesn't eat into your take-home pay. It's skimmed off of your raise. It's hard to miss money you never had to begin with. You can even automate this so you don't have to think about it. An even more effective version of this is to increase the percentage you invest with every raise you get.
For example, let's say you're investing 5% of your paycheck. You get a 2% raise. And you increase that 5% savings rate to 10%. It can make a big difference over the course of your career. By and large, automated investing in and of itself can be great. But keep track of your automated universe.
For example, subscriptions you never use or look at are an example of "bad" automation. It's money down the drain. And if you only have a 401(k) for a retirement account, it may not be enough. Consider both taxable and tax-free accounts to get the most bang for your buck.
Finally, few people just save money. Instead what they do is save money for something. In other words, there’s a goal attached. Most of us have multiple goals. Make sure you understand their priority order. Make sure you understand how expensive each goal is and adjust your level of savings to match your goal.
And finally, we've come to good idea number seven: Put a ring on it.
Not to go all Beyoncé on you, but you have to make a firm, real commitment to your financial plan. Talk is cheap. You have to put it in writing.
Research we did here at Schwab showed that 96% of people with a written financial plan were confident they'd reach their goals. I understand that correlation doesn’t equal causality, but I believe the process of going through your investments, your goals, your savings plan is a good thing. The process of writing it down exposes fuzzy, wishful thinking and forces you to get realistic.
In addition, a written plan acts as a "commitment device." It’s a contract you make with your future self. A great metaphor is a flight plan. If you're a pilot, you don't take off and hope you'll somehow end up in Paris. You have a planned route.
Let's say there's a storm over the Atlantic and you want to avoid the turbulence. When it comes to investing, you will hit turbulence. You don't steer the plane randomly. You go around the storm. Then check your flight plan and resume your original course to Paris.
When the market is up, you can look at your plan and feel good about how it's going. You're taking advantage of gains. In bear markets – which are a normal, expected part of the investing cycle – you can find comfort in your plan. Because you know your portfolio is built with the intent of weathering the storm.
So don't just think about your financial plan or just talk about it. Make it concrete, chisel it in- stone. Truly make a commitment to your financial future.
And that's it. Those are the seven good ideas.
That's a wrap for this minisode. We’ve put a link to the article in the show notes if you want the full details. It's got some informative charts that illustrate each good idea.
If you go to schwab.com/learn, there's a section called "Investing Basics" that has great videos and articles on all kinds of foundational topics like stocks, bonds, ETFs, mutual funds, and more. There are also links to some Financial Decoder episodes on things like what your advisor should know about you, setting financial goals, and the basics of the bond market, to name a few. And there are links to other articles that expand on some of the good ideas you just heard about.
If you'd like to hear more from me, you can follow me on my LinkedIn page or at X @MarkRiepe. That's M-A-R-K-R-I-E-P-E. As always, we'd appreciate it if you'd give us a rating or review on Apple Podcasts. Or comment on the show if you listen to it on Spotify.
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For important disclosures, see the show notes and schwab.com/FinancialDecoder.
[1] Changcheng Song, "Financial Illiteracy and Pension Contributions: A Field Experiment on Compound Interest in China," The Review of Financial Studies, Vol. 33, Issue 2, February 2020, pp. 916-949, https://academic.oup.com/rfs/article-abstract/33/2/916/5530608?redirectedFrom=fulltext
[2] Rebecca Tomes, "Majority of people underestimate the power of compounding interest," IFA Magazine, March 28, 2022, https://ifamagazine.com/majority-of-people-underestimate-the-power-of-compounding-interest/
[3] Charles Schwab Modern Wealth Survey 2024, schwab.com, accessed March 9, 2026, Charles Schwab 2024 Modern Wealth Survey full findings
[4] "2024 Schwab Modern Wealth Surbey Shows Increasing Financial Confidence From Generation to Generation and younger Americans Investing at an Earlier Age," Schwab.com, June 12, 2024, accessed March 9, 2026, 2024 Schwab Modern Wealth Survey Shows Increasing Financial Confidence From Generation to Generation and Younger Americans Investing at an Earlier Age | Charles Schwab