Happy Father’s Day everyone. I hope everyone is enjoying their day.
I’ve recently received a bunch of requests for me to talk about investing. A couple friends (Hi Hannah & Juan!) have asked me where they should start learning about investing and to review brokerages.
I’ve been following a bit of a linear path in my posts. I have a clear sense of how I want to to talk about banks, then credit cards, then investing. But I think I’ll change it up a bit to make this blog more interactive and cater it to the readers.
My posts may jump around from topic to topic occasionally, but I’ll keep things organized so you can still browse by topic if you click on one of the menu items above.
Let me know what you think and if you have anything you want me to cover via the comments or the Facebook page.
Enough of that.
Here’s a question I received a couple days ago.
“If I wanted to start learning and investing in stocks, where should I begin”?
Look at ETF’s. ETF stands for Exchange-Traded Funds. Have you heard of mutual funds? These are the same thing, only they charge less fees.
I have been investing in the stock market since 2008. I was fortunate to have attended a high school that offers an Investments class, and that started me on my path. I invest in a portfolio of individual stocks with an online brokerage account, but it’s not something I recommend for 95% of people. I invest in individual stocks because I am okay losing 100% of the money I’ve invested (it’s not my retirement account) and I have the time. Allocating the proper amount of time to do homework on stocks (on top of learning the basics) is not something most people with a full-time job can afford.
If you want to invest your money (whether it be in your retirement accounts or some side money), read up on ETFs. I don’t have a good book recommendation yet (let me know in the comments if you do), but there is a wealth of information on what they are online.
First, what is a mutual fund? As Investopedia puts it, “An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets” (Investopedia). If that’s confusing, it’s just a pool of money put into a bunch of stocks or other investments. So pool of money into pools of things.
ETF’s are “a basket of assets” with expense ratios” lower than those of the average mutual fund (Investopedia). Basically, a pool of things that are cheaper than the average mutual fund.
A mutual fund manager’s job is to maintain this pool of things so others can invest in it. The ETF maintains similar pools of things (usually grouped by some characteristic like big companies, small companies, Chinese companies, etc.) but there is no person in charge of managing it. You cut the middle man out, so you don’t pay that guy a fee. If my final Economics seminar class in College taught me anything, it’s that mutual funds suck and do not provide consistent great returns. A lot of that stems from the fees they charge (yes, they charge a fee even when they lose you money).
So. ETF’s are like pools of assets, like stocks.
You want to invest in stocks? Invest in a pool of stocks that you like. People have already done the homework for you. Want to play it safe? Invest in the S&P 500 (America’s 500 largest companies, companies you know of). Want to invest in emerging economies? Invest in an ETF focused on emerging economies.
With ETF’s, you have the freedom of making relatively safer investments or you can make more granular investments like certain industries or countries.
The reason ETF’s are better than picking individual stocks is diversification. Pooling assets together means if one stock tanks, it gets averaged out because it’s one of many in the portfolio.
With all that being said, I need to emphasize that whenever you invest, there is a chance you LOSE MONEY. In fact, you could lose a lot (think 2007/2008). Even with ETF’s, you could lose something like 50% of the money you invest. On the flip-side, you could make 50%. This all depends on how much risk you take. Something like the S&P 500 (by the way, the ETF for S&P 500 is called SPY) probably is unlikely to drop by 50%, but it’s also less likely to jump up 50%.
There’s SO much to go into about investing and even investing in just ETF’s. I don’t want this post to get too long, but I wanted to at least get people started on learning about investing as new grads start jobs and students have a break from school.
I tried to make this as easy to understand is possible. Naturally, since I’ve been doing this a while and I am an Economics major, I may have gleaned over certain terms or topics (some just because they could take up an entire post). Let me know if anything is confusing.