If you’ve saved up some money and you want it to work for you, and you’ve probably heard of this term called Investing and that’s the practice of allocating your money in a way, so that it returns more to you in the long run.
However, if you are a beginner it can be really overwhelming there’s tons of terms you’ve probably never even heard of for example bear v/s bull markets, ETFs, index funds, limit orders, ticker symbols, the S&P 500, etc., the list goes on.
So, I’m actually of the belief to start investing doesn’t actually have to be overwhelming,
so in this blog I will try to solve some questions like
Note: – Do a lot of research and gain enough knowledge before Investing money.
I would suggest to read the full blog post to gain enough knowledge above investments.
Why you should be investing
How you’re going to be investing
What to actually invest in
- How do I Invest?
- Why do I want to invest?
- What should I Invest in?
- Personalization
- Where can I invest?
- When should I start?
- How much should I start with
These are going to be in terms that anybody can understand.
We’ll also go over some basic beginner strategy and also talk through some frequently asked questions as well as go through a live example of actually how to invest.
So, if that sounds good to you read full blog, grab a drink and let me tell why you should be investing all right plain and simple the reason why we want to invest is that we want our money to work for us.
So, if you’re actually saving your money right now in a savings account for example at a Big Bank like Chase or Wells Fargo or anything like that the interest rates that they’re paying you on your money is not very high, typically a bank like that might offer you 0.1% percent or even 0.15% on your money.
So let’s pretend for a second that someone hypothetically gives you 1 million dollars and you take that million dollars and you put it in Chase Bank in a savings account, that yields you about 0.1% percent at the end of the year that 1 million dollars will have earned you $100 dollars in that case your 1 million dollars is not working very hard for you.
Imagine you were getting 10% on the money per year that would be a $100,000 dollars that’s a huge order of magnitude different from your $100 dollars which is the typical savings rate at a big Bank.
Even five percent on a million dollars would be 50,00 dollars a year and I think that many people could live comfortably in retirement off of that money.
So investing can get our money to compound over time and the term Compound interest refers to the interest that you earn on your own interest so this is kind of a confusing concept.
Also Read – Importance of Compound Interest
If you’re new but it can be illustrated by this example (check above picture to understand well) here say you invest a $1000 dollars and you get a 10% return at the end of 1st year, you now have $1100 dollars, when you start that next year if you get ten percent on $1100 hundred dollars you’ll end up with second year with $1210 dollars, now pretend that this pattern continues for another 20 years your money starts to earn money on the previous balance every single year so at the end of year 20 you’re going to have $6727 dollars.
So just by putting $1000 dollars in and getting a return every single year, your money starts to grow and grow and grow and that’s called Compounding.
Inflation: –
Another reason we want to invest some of our excess cash instead of having it sit in a savings account is the concept of inflation.
The US has a central bank and that is called The Federal Reserve and that actually dictates the monetary policy for the United States.
But you just need to know that they are targeting a 2% inflation rate every single year for a healthy economy but I’m sure you’ve seen the news recently that the inflation reports are saying it’s between 6 – 8 % a year.
That means if our money isn’t earning 6 – 8 % a year that money is losing value just by sitting in the account, it is losing purchasing power and all right.
Example: – If you really want to see inflation in action let’s take an example of the stamps that you buy for your letters in 1971 the stamp cost 8 cents to mail.
A letter as of this year it is 63 cents to mail that same letter the mechanics are exactly the same, the stamp allows your letter to be delivered anywhere in the United States.
But as time has passed the stamp has just gotten more expensive due to inflation.
So that’s also why we want to invest so let’s get into.
How do we actually invest?
The first thing to understand about how to invest in the stock market is to understand that we can actually invest in a variety of things,
Some type of investments are below,
- In Companies (buying Stocks)
- Real Estate
- Collectibles
So, you can invest in companies like investing in stocks the better that a company does financially the better that your investment is going to do.
You could also invest in real estate so your family may have bought a house in the 90s and maybe they bought it for a $100,000 dollars at that time, but over time nowadays your family home is worth one million dollars that 900k difference that you’re seeing this is known as Real estate appreciation.
Appreciation is a term to describe what happens to your asset when it appreciates over time so it increases in value over time.
You could also invest in Collectibles like Pokemon cards, for example the first edition Charizard cards are going for like $20,000 dollars these days in the online sites but back in the 90s the late 90s when the Pokemon cards just came out those cards were probably worth no more than $20 dollars.
All of these Investments do carry risk and it can be pretty difficult if you’re a beginner to figure out what to actually invest in.
But I promise you if you just keep reading on this site I am going to answer all of these questions.
Now I will tell you about investing in the stock market is investing in companies.
This is the most common type of investment and also has the most predictable returns over a long period of time.
I’m going to define a long period of time as anything over 10 years but the longer that you hold on to your stocks and Investments the better and I’m going to show you with a stock market example.
So, the above graph that represents the S&P 500 which is known as the top 500 companies in the United States and
I’m going to explain later how to buy this exact Market or this exact S&P 500 with just one purchase, but what I want to tell you guys is what’s really interesting here is that,
If we check we can see that this S&P 500 was started back in 1983 and you can see that the general Trend is that it goes upward over time now sure there are some dips and there’s some valleys right here as you can see famously in 2008 the market kind of had this little crash right here and sometimes there are periods where if you don’t hold long enough you could lose money.
So, for example if you bought in 2000 you sold in 2003 you would have lost money investing in the S&P500, but if you had held long enough you can see that back over here in 2015 you would have made money on because it’s higher this number what it was back in 2003.
Historically if you invest in the S&P 500 Index it typically returns between 8 – 10% a year and that’s since the Inception of the S&P 500.
So that means if you had put a $100 dollars of your hard-earned money back in 1980 let’s say you were live back then and you invested it into the stock market it would be worth $9977 dollars today adjusted for inflation a $100 dollars is worth $360 dollars today.
But that means that your money still would have gone up about 27 times in value just for investing and that’s why it’s so important to invest and grow your money so that you’re not just leaving money on the table and honestly investing is not that difficult, especially if we know what to invest in.
What do I invest in?
let’s get into what do we actually invest in all right in terms of what to invest in as a beginner.
I’m sure many of you have heard of your friends or family buying individual stocks so maybe your dad or your friend might put a hundred dollars into Coca-Cola stock or Tesla stock or something sexy like that.
The thing is though is that investing in individual companies can take a lot of work, oftentimes they are more volatile in their returns and they’re definitely like a more active style of investing.
Think of like a day trader, a day trader is looking to maximize it Returns on a daily basis, so they might be looking at a Stock’s performance by minute, by hour and that’s something that takes a lot of work adds a lot of stress into your life and it’s not something that as beginners we want to do.
Index Fund: –
A more passive style of investing will just involve buying all of the stocks in the stock market kind of forgetting about our investment and just checking it once or twice a year and seeing our money grow over time and the way that we’re going to do that is to invest in what’s called an Index Fund.
So, an Index fund is something that a lot of financial advisors will put their clients into and basically it’s a fund that is well Diversified tracks the stock market and as long as you invest in them, over time consistently the path to becoming a millionaire is almost guaranteed
So, what is an index fund exactly though so to understand when an index fund is we actually need to talk about the fund that preceded it and that’s actually known as a mutual fund.
Mutual Funds: –
Mutual funds is a concept when many investors will pool their money together means they’ll come together.
So, let’s say you have a Million dollars and I have a Million dollars we both give it to a mutual fund manager and that fund manager’s job is to try to give us the best possible return.
They might raise more money from a bunch of different people and by pooling that money together they then pick a selection of stocks based on their expertise to try to get you the highest return.
In exchange for this service the money manager will charge a really high fee to its investors because the money manager is doing all the work and also the money manager has kids to feed or a house mortgage to pay off as well, so they need to get paid a pretty high fee.
Difference Between Index & Mutual Funds: –
A Mutual fund has a professional manager involved but an index fund on the other hand is passively managed and it tracks an entire stock index.
A stock index is something like the S&P 500 which tracks all the 500 top companies in the United States the NASDAQ is another example of an index.
So, an index fund would automatically track and invest all those companies in that specific index so all that we have to do as a beginner investor is by that Index Fund.
So on the above picture I have the S&P 500 companies by weight just to give you an example of what kind of companies are in the S&P 500.
We can see that first in the list is Apple the world’s largest valuable company it has a weighting of 7.18, in the second Microsoft, third is Amazon and NVIDIA, Alphabet, Exxon, Visa, Tesla, Home Depot, etc., you get the idea these are all larger really large companies.
The list (https://www.slickcharts.com/sp500) you can see that the companies will start to get a little bit more unfamiliar for example if we can find in the list to the 400s we can see Camden Property Trust never heard of it in my life.
However, if you were to buy an index fund that tracks the S&P 500, your money would get split proportionally among all the S&P 500 companies that we see here.
So an example of an S&P 500 Index Fund would be like ticker symbol/codes VFIAX, so a ticker symbol is like an airport code.
So whenever you’re landing at your airport there’s usually a three letter code for example so JFK would be John F Kennedy Airport or London Heathrow would be LHR.
Stocks and Investments also have their own ticker symbols so if we check we can see that ticker symbol for Apple is AAPL, Microsoft is MSFT, Amazon is AMZN, etc.
So, Index funds are passively managed which means that they don’t have a professional money manager which also means that there are not super high fees for owning an index fund
What the index fund does it’s just really a convenient way for you to invest your money and then get instant diversification among all of those holdings within the index fund.
It is definitely a really great beginner strategy because it kind of takes the guesswork and the work out of investing you just invest in everything.
So, if you want some more further evidence you can pick individual stocks consider the tech company like Intel, they were once a high-flying stock, back in the 2000s during the Dot-com bubble but if you had chosen this individual stock back then you can see still not have broken through its all-time highs back in 2000.
Now compare that performance to the overall stock market performance since 2000 which has four times since then.
So, this is the danger of picking individual stocks while there is more reward sometimes there is definitely more risk and so what we’re looking for is consistent gains over time because that’s just really nice now everyone’s goals and time are very different when it comes to investing.
Personalizing Investments: –
Investing is extremely personal right, so when I used to be a financial advisor one of the first things that we would ask our clients is
- What’s your risk tolerance
- How long do you want to be Investing for?
- Are you the type that’s okay with really big risks and big swings in your account?
- Or do you just want to see it steadily grow over time
And this is something that you should definitely ask yourself before investing, I would say the index fund strategy is very good for a beginner, investor that’s on the younger side.
However if you are near to your retirement let’s say in five years you might not want to invest in index funds because,
They could be too volatile for you and the reason is pretty simple is that if you’re about to retire in five years you need all the money that you can possibly get your hands on.
So it doesn’t really make sense for you to risk your money in the market, now compare that to someone who’s 20 years old who has 45 years left to retirement that person might have a higher risk tolerance because they have more time to kind off up and mess up.
Even if they do mess up they have more time to recover so the basic tip here is that if you are earning a consistent income you should be setting aside a portion of that income and consistently investing over time again the average return for the market is typically around eight to ten percent a year.
In the S&P 500 but as you saw in my earlier example with the S&P 500 graph that there are periods of time stretches like 8 – 10 years where it might trade flat or you might actually lose some money.
I would say for the majority of people watching an index fund that tracks the S&P 500 is the way to go now.
You’re probably wondering to yourself well could the stock market ever go to zero, well historically based on all the data it probably will not go to zero like for the stock market to go to zero basically all hell has broken loose on planet Earth and all of our financial systems have collapsed.
So if the stock market were ever to go to zero let’s just say we would have way bigger problems than just the stock market being zero.
I’m sure money would have no value at that point.
So is that a realistic risk that you should be worried about probably not.
Where do I Invest?
In terms of where to invest your money within what type of account you usually want to use it in a retirement account or a brokerage account.
Now a retirement account is something like a 401k in USA, which is employer sponsored which means that your employer usually sets it up for you and you can invest in their program or there are also individual retirement accounts such as the IRA/Roth IRA.
The main advantage of investing in a retirement account is that there are usually some tax advantages now if you are investing within a retirement account just know that the trade-off for those tax advantages is that you usually have to wait until you retire to withdraw that money.
So essentially, you’re locking up your money until retirement, not all the time there are some ways that you can get it out before retirement but you’ll usually have to pay penalties.
Now if you don’t want to invest in a retirement account what you can do is simply invest in what’s called Brokerage account and those are usually taxable on a year-to-year basis.
So back in the day before the internet what you would do is you would call a stock broker on the phone.
But right now, instead of contacting a broker you have a brokerage account or a brokerage app and what you do is sign up for an account and then you can just place your trades electronically.
Some of a brokerage like Fidelity, Charles SCHWAB, Robinhood, Webull these are all examples of brokerages.
When you should Start Investing?
I think this is always a question that people have, like okay am I too old to invest, am I too young to invest, the short answer is that you should start investing as soon as you can.
The earlier you start investing the better because you have more time to take advantage of those Compound returns and more time to hopefully if you mess up you can make up for it now.
Consider three things before start investing
- Pay off all your high interest rate debt
- Establish your Emergency Fund
- Only invest what you can afford to lose
How much money you want to start with?
I have kind of a controversial take; a lot of people are going to say to invest whatever you have into the market.
I think a more important condition on whether or not you should do that is that if you have a reliable way of generating more income then you should be consistently investing into the market.
But if you only $100 dollars to your name and you invest in the stock market and let’s say you get 10% that’s $10 dollars over the course of a year that’s not a lot of money.
In that case when you only have a $100 dollars it’s much better to invest that in yourself build some skills, start a side hustle, so that you can get more consistent income.
But if you are someone with a consistent salary you don’t have any high interest rate debt and you have an emergency fund taken care of that’s when I would say start to set aside a portion of your income every single month and invest that into the market.
I hope you enjoyed this blog post I hope that it was incredibly valuable and helpful as a beginner getting into investing please share the post with your friends if you think it would be helpful.
