Q: I just started my first job about six months ago. What are the best long-term and short-term investing options I should be looking into?
A: Your instinct to start investing is right on. Since you've just entered the workforce and I'm assuming you're young, you have a huge advantage in investing that can't be overstated. As a young investor, you can afford to take greater risk than older investors. And that added risk, if history is any guide, should result in a exponentially greater returns over time.
But before you take on long-term risk, you need to make sure you have a buffer to handle short-term cash crunches. Many financial planners advise having enough cash to cover all your expenses for three months. But from an investment standpoint, I recommend having six months' worth of cash in a money market account that you can easily tap. That cushion will let you resist the temptation to dip into your long-term investments if there's a disruption in your income.
So, don't put money into stocks until you have at least six months' cash put away.
Once that's done, consider investing in any retirement savings plan offered by your employer. Many offer to match contributions you make to tax-advantaged 401(k) plans. I don't care if you're an expert stock picker: You shouldn't miss out on this benefit. The match is basically free money.
Next, be sure to put money into a Roth IRA. Roth IRAs don't give you a tax break now, but they pay off huge in the future because you don't pay tax on the earnings as they accrue, or when you withdraw them, if they've been in the account at least five years. This is one of the best bets anywhere.
Within the Roth, and probably in your employer's 401(k) plan, you choose the investments, so you can consider investing in a stock index mutual fund or an exchange-traded fund (ETF) that tracks the broad stock market.
You'll notice we haven't started talking about individual stocks yet. Before you fire up your brokerage website, you need to take advantage of all the free-money advantages you can and make sure you are diversified, by using index funds that own hundreds of stocks. Only then does it make sense to open a taxable brokerage account and start picking individual stocks.
When you get to this point, feel free to come back and ask about stocks and industry sectors here at USATODAY.com's Ask Matt. By that time, if you have followed the advice in this column, you will be in a good position to be a long-term stock investor.