What's in this Article?
We’ve laid out some of the basic steps to help you get started. It’s not a detailed guide, but just a few simple steps to get you started thinking about your first foray into the world of investing.
The Market Is Controlled by No One and No One Thing
If you paid any attention to the financial news this week, you’ll know that the Dow fell over 10% in a matter of days. A 10% decline like that in a few days may seem significant, but historically, it’s not. In fact, looking at the chart below from Robert Shiller, you can see that the market has declined by 10% or more in just a few days on multiple occasions.
What’s important to understand is that these percentage drops don’t happen in a vacuum. They’re reactions to events. For example, in 2008, the market fell due to a combination of an 18% drop in the Chinese stock market, a high oil and gas prices, talk of a recession, the bankruptcy of Hank Paulson’s former firm (Lehman Brothers), sinking mortgage defaults, growing credit fears, shrinking credit spreads, and falling confidence in the value of US housing. That’s a lot of factors that led up to it. But if you were only looking at the rise in oil prices, or the decrease in home values, you wouldn’t have been able to see it coming.
The market is a complex system, and the factors that come into play can be hard to fully understand.
Investing Is a Small Act of Faith
Investing your money can be a nerve-wracking experience. There are so many things that could go wrong. How can you possibly pick the right stocks? Considering the time, effort and knowledge it takes to be an expert at investing, is it really the moneymaker that a lot of people claim it is
These are questions that every investor has at one time or another. However, there is one thing to keep in mind: investing is a small act of faith. Yes, it’s true that investing carries with it a tremendous amount of risk. However, if you’re smart about it, investing can be a rewarding experience, especially when done in the long term.
To do it smart, however, you need to start early – as early as high school. In fact, it’s not too early to think about your investment habits.
Admittedly, when you’re first starting out, your investment decisions won’t be based on the nuances of the stock market. Instead, they will be based on idealism and a passion for justice. However, by the time you’ve reached college, you’ll learn to set your goals higher.
The Earlier, the Better
Investing is a term that means spending money on a resource that is expected to earn a return. And if you start investing as young as possible in your life, you will have a solid head-start to a successful financial life.
Now, this wouldn’t be that difficult, would it? Strangely, it is extremely difficult for some people to understand. There are many different kinds of investments out there, but here, I’m going to tell you the most basic kinds, so you do not have to go to school to learn them.
So, here are the 11 investments that you should master in your early years!
One of the most basic investments you can make is the savings account. You can start by putting money in any bank, or even your friends’. You can also find a savings account with a good interest rate.
Then, you can diversify your portfolio by investing in a Fund. It is basically a pool of money that is invested in a group of assets, such as stocks, bonds and cash. These investments are then distributed to all the investors of the Fund.
Know Your Investing “Why”
Investing is usually connected to the notion of planning for long-term financial goals, such as retirement, home purchases, college, and vacations. Although these can certainly be your goals, the truth is that investing is something that you can do on an hourly basis.
Today, the word “investing” tends to conjure up images of stocks, bonds, mutual funds, and other objects associated with Wall Street. In reality, however, most people invest on a daily or weekly basis without realizing it.
There are several different types of investments, including stocks, bonds, options, mutual funds, and real estate, and investments can be of value for those both in and out of retirement.
These investments can fill your life with joy and your bank account with security. They can leave you prepared to face financial hardships, help you prosper in the future, and provide for your loved ones. The opportunity is constantly available for you to improve upon and grow your wealth.
By investing your time and your money, you can make the most of your finances while still enjoying your life. By taking a few simple steps, such as the ones presented in this book, you can begin creating wealth and security for yourself or your family.
Some Funds Have Purchase Minimums
Just like anything else, there are a few simple things to keep in mind to help you get started on your mission toward investing success. Before you dive into it, consider the following points:
Assets Are Different
It’s important to remember that each asset class is different. When you are investing in stocks and bonds, you’re actually getting into a business rather than a single investment. This means that you should look at your returns on an individual basis rather than just lumping them together.
By diversifying, you can eliminate the risks that can result from unexpected happenings that affect stocks, bonds, and other available options. As a rule of thumb, you should try to hold stocks from many different companies, different sized companies, and even a few different industries.
An easy way to start diversifying is to make it a habit to move funds to different types of customers, such as lowering your risk from aggressive companies and moving those funds to more conservative companies.
Different Funds Have Different Fees and Management
When you’re shopping for an investment product — whether it’s mutual funds, stocks, bonds, or Exchange Traded Funds (ETFs) — the fees and expenses are often included in the prospectus or talked about by the brokers who start you into the fund. It’s important that you pay attention to these fees and expenses.
The reason that these fees and expenses are so important is because they can diminish the performance of your investment portfolio. In effect, investing a certain amount of money at the start of the year can actually reduce the performance of your portfolio at the end of the year.
Here are a few points to look for when you’re evaluating a fund’s expense ratio:
If you’re looking at a mutual fund or ETF, the expenses will generally be listed as a percentage of the assets invested, which is called the expense ratio. There are some mutual funds and ETFs that charge zero fees, but normally you’ll find a fee between 0.25% and 1.50% of your total assets.
There's a Difference Between Tax-Advantaged and Taxable Accounts
We all tend to think of investing as an all-or-nothing game. We either invest in an account like a Roth IRA or a 401(k), which is taxed above a certain threshold, or we just put our money in a standard savings or checking account. But just like a coin has two sides, so does the investing world.
Tax-advantaged accounts give you certain tax advantages (which you've heard about a million times). But they also have their disadvantages (which you also probably heard your parents or grandparents talking about). It's an understanding of these disadvantages that separates those who understand from those who don't.
Taxable accounts are like the accounts in your thoughts. They're taxable, but you can put a lot more money in these accounts than in tax-advantaged accounts.
While tax-advantaged accounts are characterized by their corresponding taxes, taxable accounts are (as the name suggests) characterized by the fact that they are not tax advantaged. If you're already investing in standard savings or checking accounts, then you're a taxable investor already.
You Don't Know What You Don't Know
For those of you without a financial background, it might be a bit dizzying to find yourself suddenly immersed in a topic that seems to involve endless numbers and formulas or paragraphs with unintelligible jargon sprinkled throughout the entire conversation. It's enough to make your head spin.
But, the truth is that the financial world is sometimes difficult to understand – even for those of us who make it their life's work. Even if you completely understand all the vocabulary (Defined as "the branch of knowledge that deals with the principles underlying financial and monetary affairs." – Investopedia).
Diversification is an excellent example. Diversification is an investment strategy that helps to protect your assets. It involves spreading your money across various asset classes (e.g. international markets, government bonds, stocks, real estate, and physical assets).
It's a clever concept – but, most people aren't familiar with the term and thus, don't know how to put it into practice. The words and phrase are thrown around so much that it's regularly confused with the general idea of having a well-diversified portfolio or investment portfolio. People also use it as a way to make an investment appear to be more complicated than it is.
So, here's a list of 11 basic investing terms and their definitions that you should get familiar with early in life.
Don't Invest Your Emergency Fund
One of the most important pieces of investing advice is to not invest your emergency fund. In short, you should have enough money to cover 3-6 months' worth of normal living costs in your bank account. This allows you to meet any unexpected expenses without tapping into your investment account and buying high.
In addition, you shouldn't have any credit card debt. Your credit card should only be used for paying for things in advance or for emergencies – which is why your emergency fund should always be your last line of defense. Investing your emergency fund deprives you of a buffer zone against life's unexpected blows and interest payments on your credit card. It might seem counterintuitive to not be able to tap into your savings for a potentially lucrative opportunity, but investing in a down market or during a recession is every bit as risky as going into debt.
Fees Can Compound Just as Easily as Interest
Brokerage fees can be easy to overlook, but they can be a big deal over long time periods. It’s funny how you can lose a lot of money to fees you don’t even know you’re paying. One example is the expense ratio of certain mutual funds. It’s important to realize that a fund’s expense ratio is separate from your brokerage fees. It’s important to see how they work because they can add up quickly, especially on smaller portfolios.
You Can and Should Make Changes as Life Changes
Thank you for reading, and I hope these investment ideas come in handy. I do want to clarify one thing that van Tonder wrote about, and it will likely be his most controversial post of all:
“ Adjust your investment portfolio based on your current needs and goals.”
“What if you are retiring next year and are heavily invested in bonds? You should likely ‘sell high and buy low.”
What a few introductory classes in finance will teach you is that you can and should change your investment portfolio as you change your life. In other words, when you have a child, 529 college savings plans will likely be more important to you, and when you head closer to retirement, you will likely be more focused on income-producing fixed-income holdings, annuities, and similar holdings.
The point is that you must be flexible with your finances, and investments including your portfolio must be flexible as well. Are you having a child within the next few years? Are you planning on holding a house for a few more years? Are you planning on retiring in the next 10, 5, or 3 years? These are all questions that should affect your investments.