Disclaimer: I try to provide accurate information on personal finance and investing, but it may not apply directly to your individual situation. I am not a financial advisor. Therefore, I recommend you consult with a financial professional before making any serious financial decisions.
Investing may seem complicated and that’s what investment advisors want you to think. If the average person thinks investing is too complicated, they will either not invest or pay someone ridiculous fees to invest their money on their behalf.
The truth of the matter is basic investing can be done by anyone. I promise it’s not rocket science. All you need is to understand a few concepts. Hopefully this blog post will help you debunk the myth that investing is too difficult for you.
There are two types of accounts you can use to hold your investments: tax-advantaged and non tax-advantaged. Examples of tax-advantaged accounts are: Traditional Individual Retirement Accounts (IRA), 401k, 403b, Roth IRA, and much more. Non tax-advantaged accounts are pretty much any other type of account that doesn’t provide some type of tax benefit for holding your money in that account.
Each account has is advantages and disadvantages. 401ks and Traditional IRAs allow you to deduct the amounts contributed to them from your income when you file your taxes (up to a certain limit). This means when you withdraw the money in retirement it’s taxed as income.
Roth IRAs and Roth 401ks a slightly different. You contribute to them after you paid taxes on the income. This means withdrawals are not taxed as income (since you’ve already paid it). The beauty about these accounts are that they you’re not taxed on the gains of the investments
Last, but not least, are non tax-advantage accounts, which are your standard investments account. Similar to Roth accounts, you’re contributing to the account with income you’ve already paid taxes on. However, you will be taxed on the gain of the investment when you sell it.
This is a pretty high level overview, but hopefully it gives you a better picture of the pros and cons of each account type. I’ll try and write another blog post on my strategy around these various account types.
Having money in a 401k or IRA doesn’t necessarily mean you have invested that money. You can have cash just sitting in these investment accounts. Investing requires choosing a type of vehicle. These vehicles consist of mutual funds, exchange-traded funds, certificate of deposits, and much more.
Now each of these vehicles can hold different types of investments you want to buy. I am going to primarily focus on the two ones: stocks and bonds.
I could probably write a whole blog post on these two asset types, but I’ll give you the short version. Stocks are considered higher risk, but with that risk comes additional reward. Conversely, bonds are considered to be lower risk, but the reward isn’t as high. There are assets that pretty much fall along this spectrum between low risk and high risk.
Invest In The Entire Market
Okay. Hopefully you’re still tracking with me. Now if you’re the average Joe like me, you probably have no idea what companies are worth investing in. So how do you pick? What should you do? Well the answer may seem kind of weird, but the trick is to invest in the entire market and buy a little bit of everything.
By investing in the entire US stock market or the entire international bond market, you’ll be getting a little piece of everything. This helps you diversify your investments. When one stock’s value goes down, another company’s value may triple. And vice versa.
In the past year (which has been a good one), we’ve seen our portfolio earn a return of around 9%. On the flip side, you are also guaranteed to lose money at some point when you’re investing. That’s just the way the market works. It’s not worth trying to time the market. Timing the market is like predicting the future. Sure every once and a while you’ll get it right, but the majority of times you’ll get it wrong. Historical data shows us that overall the market always goes up despite some drops along the way.
Pretty much every investment company has a mutual fund or ETF that invests in the entire stock market. Make sure you pick an investment vehicle that has low fees. These fees can start to add up over time and can stunt the growth of your portfolio.
So here’s how it all works:
You take your cash. You put it into an investment account (example: 401k). You select an investment vehicle that has your desired investment type (example: mutual fund with US stock market).
That’s all there is to it. This is obviously a very basic guide, but hopefully it gives you an idea of how easy investing can be.