Investing should be for everyone but with only 60% of Americans financially literate and 50% holding individual stock, the education that really needs to go around isnât reaching nearly as many households as it should be due to the stereotypes we hold against finance, one of which includes how hard and confusing it seems to be.
If youâre bombarded by all the financial jargon, rich quick schemes, experts on CNBC, and yellow Dummie books that look like history textbooks with mathematical jargon and numbers, youâre feeling the same way majority of Americans are.
Iâm not going to say donât worry because you wonât make a change if you let your accountability slide on the personal finance side of things but rest assured, Iâm here to tell you that you are making this 100x harder than it really is.
Take it from me. A student that has endured 2 semesters going on to my third through the scary world of Zoom and the world wide web all in my bedroom/school/yoga studio and did I mention, home?
Finance is simpler than we all want it to be.
So without further or due, letâs stop being scared of something that can make our lives easier and better.
Accountability is everything. The principles I will outline below have allowed me to grow my portfolio from $50k to over $870k to today by not spending a dime and only 40 hours upfront to solidify this knowledge. And guess what, you are more than able to grow this much as well and can continue watching Netflix because we all need some vegging out to do these days as well.
Before we get started, essential terms are a must.
No need to dish out a couple grand and go into debt to learn these terms from a professor that is half asleep and been there for centuries. Instead have more fun, save money, and use your time wisely by taking advantage of this powerful age of the internet.
Understanding these basics will put you ahead of 60% of Americans already.
Asset classes: the types of assets you can invest your money in.
5 include: (shares, bonds, commodities such as gas and silver, real estate, and cash).
Funds: a collection of holdings (business entities such as companies) listed under one umbrella managed by a fund manager.
Fund supermarkets: these are platforms that allow you to invest in a range of fundsâââacross sectors, geographies, and asset classes.
Stock picking: Opposite of the above. Youâd be doing all the researching, analyzing, and picking individual company stocks yourself for no fees. Note, this is time-consuming and requires expertise and understanding of each companyâs financial statements, performance metrics, similar to a day traderâs job. Hard to time the market-would stay away unless you are a professional and even them mess up often because the future is unpredictable.
Portfolio allocation: sum of your investment value/worth and what your portfolio is made of. For example: 60% stocks, 30% bonds, 10% cash.
Total Expense Ratio: when you invest in funds, youâll incur several charges. Over time, they can be a hefty percentage of your returns, and sometimes those fees arenât justified as you arenât always guaranteed to beat the market. These fees include management fees, ongoing service charges, initiation fees, and transaction costs (for buying and selling shares).
Index funds (or trackers): Types of funds that track and replicate the performance of an index, such as the S&P 500. This could also be a benchmark, such as an index that tracks a specific industry. The fund is not trying to âbeat the marketâ (generating higher returns than the given index); rather, it tracks it. They do not require any active management choices. This results in much lower costs compared to more active funds with a manager.
Passive funds: like trackers, these arenât actively managed by fund managers. The fundâs management team monitors the fundâs performance but does not actively pick and choose stocks or the fundâs composition for you.
Active funds: conversely, these funds are managed more actively. The fundâs manager picks and chooses stocks to go into the fund. This amounts to higher fees as an investorâââbut it is important to note that regardless if you make or lose returns, the fees are still set.
Diversification: spreading your bets, or a.k.a ânot putting all your eggs in one basketâ. This is in order to reduce risk. If you invest in stocks, bonds, real estate, possibly BitCoin (remember your password!) in companies operating across the global (geographic diversification), and in various sectors (sectoral diversification), youâre reducing your risks. Just like with your income, a typical millionaire has 9â10 income streams, they never solely rely on 1 job in case itâs quits. If one sector, company, or geography performs poorly, others are likely to compensate for it thatâs why a passive or index fund is the best bet so there will always be upside growth and your portfolio wonât take a boom if one company in the fund goes bankrupt.
These basic principles will get you far, donât underestimate them as these terms will pop up everywhere and will allow you to not get scammed by brokers who want to take advantage of you especially if you are a minority (woman or of color).
Now since weâve gotten that down pat, letâs look into the basic ways to open a portfolio and start making money now.
Open That Investment Account
Now, there are hundreds of credible platforms everything from Fidelity, Charles Swab to Vanguard, and even Robinhood that allow you to buy and sell your trades. Yet some are better than others. Out of the 4 listed above, there is one that I solely do not recommend as an investment platform to use.
Not because they arenât reputable or safe, rather because they have a concerning past with the SEC that makes it identical to a gambling platform that in short, never ends up in the right direction especially for your money.
If you want to lose money, take on risks, and learn the basics of Las Vegas style, then try out retail investing platforms. They donât work in your favor because they entice you with deals and sell your behavior to 3rd parties to make the platform seamless to use. They donât care about your balance, they just want it.
So the first thing youâll need to do is research which platform sounds right for you. In all honesty, most are the same but depending on how much money you allocate, the fees could differ. And remember, even though Robinhood has enticing 0% commission fees, that doesnât mean it is less than your losses which will most likely be more.
Remember your money should be invested base on the goals you set out for life, not what is hot today. It shouldnât be speculative gambling or fun in any way.
I also donât recommend using banks as providers such as Chase who tend to offer and promote only their funds that restrict your ability to invest more broadly. Take advantage of better cost-effective opportunities that are the same. Thereâs no insider trading so everything they can do, another service can and even you as well. They will always say theirs is the best and you have to convince yourself to do the research for what is really right for you.
Since I started earning money from teaching private tennis lessons when I was 10, Iâve used Vanguard since because it is an easy, intuitive very basic, and simple platform that has great customer service on late Saturday nights for the introvert in me that has nothing else to do besides making sure Iâm getting the best bang for my buck. I am sure Iâm not the only one who does this, especially the rich.
Fee Check List:
-Annual fees
-Management fees
-Initiation fees
-Fees for a certain monetary amount, typically, the more you invest, the less you pay
-Extra charges-transaction fees
Make sure you address these fees as they will incur regardless if you make a gain or loss.
Understand Your Risk Appetite and Financial Goals
Now that you have a provider, you can choose to put your funds into 5 different asset classes as the ones discussed above:
1) Shares in companies listed in the stock market.
2) Bonds issued by institutions and governments.
3) Commodities, such as silver and gold.
4) Real estate, investing in property or buying shares in investment trusts or REITS.
5) Cash for any short-term purchases or for a rainy day a.k.a recession or COVID.
Each of these asset classes has its own degree of risk and return. The higher the returns, the higher the risks are involved hence the larger the loss potential.
As a rule of thumb, the younger you are, the more risk you can take due to your time horizon of being able to outweigh the losses. Overall, the indexes such as the S&P500 historically always go up as a bull market. Of course, the shorter you are invested, you will be affected by the losses in the intraday activity. Never a good idea to be a day trader if you actually want to make profit. They are just making speculative options and betting that is made for Las Vegas.
Goal Setting
Plan out your short and long term goals. If you are looking to go on vacation or buy a house in the coming months, make sure to have cash on the side for the trip and it is recommended to put 20% down on a home.
Longer or larger goals may include saving for college, a wedding, or planning for retirement. In that case, make sure to have a balanced portfolio with less cash so it can grow because cash loses its value due to inflation each year. Currently, the inflation rate is at 2% due to the pandemic and will steadily increase once the economy is back and running and the rich have things to spend on because without any vacationing or partying, they are saving big time.
Take On An Investing Strategy That Works For You, Only
The worst thing you can do for your mental sanity is to manually invest daily and try to time the market. Since Iâve been 10, Iâve just invested every month on auto-pilot in my passive account since Iâm not willing to spend hefty fees for a broker when I can allocate a few minutes per month researching the value stocks for my portfolio instead. Each month my picks get interchanged and the funds get immediately drawn from my checking account(income) into my portfolio so there is no hassle forgetting, spending it instead or doing it myself.
There are 2 ways you can invest in your portfolio regularly:
Invest on auto-pilot: choose the amount of money you wish to put into your portfolio, when, and in which funds.
Invest manually: manually allocate how much you want to put into the market per day
Diversify Your Assets
Diversifying means never to be beholden to one asset class, hence not putting all your eggs in 1 basket. If a crisis hits, you never want to be relying on 1 income source to pay your bills and be on the verge of eviction. Same thing with your portfolio. Make sure you have a balance of each asset class to take a return on a bit of everything.
As you age, you must be more conservative to prevent bankruptcy and sudden losses. The younger you are, the less cash is needed but still has to be kept on the side because emergencies can happen anytime.
Hope for the best, plan for the worst. Personally, I follow the 80/20 rule, 80% stocks, 20% bonds since Iâm only 20.
Simply put, there are 3 main ways you can diversify your investments:
Asset diversification: you can spread your bets across multiple assets, such as owning 10% in stocks, 30% in bonds, and the remaining 60% in real estate.
Sectoral diversification: funds that are focused on certain sectors (such as Consumer Discretionary, Tech, or Industrials). If one is performing poorly, the other will compensate throughout your portfolio thatâs why having an index or passive fund are your best bets for more aggressive stocks such as Tesla that was never profitable until 2020.
Geographic diversification: funds that let you invest in a range of companies. Donât be afraid to go outside of the US, especially these days if you know what I mean. This mitigates risk as if one area is subject to governmental restrictions, political turmoil, or civil unrest.
Additional Tips That I Would Prioritize
Donât invest in anything you donât understand
Do not time the market
Always agree with the Fed
Donât touch, check, play, or think of investing as a game. Leave them alone
As the investing legend Warren Buffet stated:
âOur favorite stock holding period is forever.â
Buying and holding for a long time will always even out and provide returns in the future. Be patient and proactive.
Wrapping It Up
With this knowledge that youâve acquired, investing simply cannot be missed out on, especially if you want to earn free money on top of your hard-earned income and live a stable, wonderful life. Everyone deserves to be a part of the market and it is only reserved for those who take the time and patience to learn these basics. Buffet or fancy Goldman traders donât know anything more than you do. Sure, they have decades more of experience and learned from their mistakes, but everything in the market relies on patience, realism, looking into the future not the end of the day, and being diligent about goal setting not betting. Itâs so basic most of us donât believe it. Donât rely on graduate programs or textbooks to get you far. Rely on the power of the internet and here to propel your financial engine.
I hope I made you more interested in opening up your first investment account and begin to allocate as little or as much as you want to start achieving your goals and living a better existence with a cushion full of investments.