Investing for Beginners 101
You need to invest your money. It doesn’t make sense not to. Even if you only invest 1% of your money, it would still be worth it. Investing for Beginners 101: Make your money work for you.
This info-graph really explains why it is important to invest NOW! We all have reasons, excuses or ideas why we cant. However, investing $10 a month can go a long way.
You understand that investing is smart and people have made a lot of money doing it. The problem is, you don’t know how. You’re scared to lose all of your money. You have loans. You’re about to get married. You have kids.
Life is hard. I get it.
Good news is, I am about to tell you that all of your concerns are valid.
There is a perceived notion that investing takes a lot of money and understanding. It doesn’t.
You CAN understand investing. After reading this guide, you’ll have the basics needed to get started.
You also don’t have to do all the work. You’ll be relying on automation.
A set-it-and-forget-it approach!
After you read this guide, the only thing left for you to do will be to take action.
Don’t worry; I’ll guide you through the process.
Consider this your Investing for Beginners 101 Cheat Sheet. I will explain the basics of simple investing and aim to inspire the proper mindset you need to succeed.
Now that your’e formed up – let’s get started.
By “investing” I am talking about the stock market. There are other forms of “investing” such as, putting your money into a business you create, or a home you will live in.
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”
So why invest long term?
There is no “get rich scheme” in the markets. If you see a guide for one —RUN!
Humans are inherently selfish. Why would a guy or gal stating that they have made millions — be sharing their guide all of a sudden?
Do they finally have enough money? They want to share?
No, No, No.
They are hoping to lure you into a dream. Sucker punch you. And take your $9.99 for their guide.
Think long term.
The illustration below shows a $1,000 investment over 30 years and compares it to what you would earn with a checking account, a savings account and an investment account.
With an investment account on average, you can expect to earn over 19,700% more compared to the others!
Interestingly, over 30 years you can only expect to gain roughly $175.80 with a checking account and $281.89 with a savings account – a difference that is pretty meaningless when you look at it over such a long period.
Especially when you would have gained over $6,000 if you had just invested your money.
This why I keep preaching– Make your money work for you!
You’re better off keeping 90% of your money in a checking account and 10% in investments than 10% in a checking account and 90% in a savings account.
The Meaning of Portfolio and Diversification
Whenever you read about investing, you’re bound to hear the words Portfolio and Diversification. An essential component to Investing for Beginners 101.
What do they mean and why should you care?
In the picture below, you can see a silhouette of you at the top of the tree. Everything you own is considered part of your portfolio. Your retirement accounts, your investment accounts, even your home is a type of investment.
What you don’t see in this image is a checking account, savings account or debt.
Because none of those are investments. They are all short-term assets.
Your portfolio reflects your long-term wealth building investment strategy – not the short term.
You’ll notice that we describe four general types of investment vehicles:
- Individual Stocks
- Stock Funds
- Bond Funds
Sure there are many more investment mixes. However, I don’t want to distract you from the ultimate point of the illustration. Which was to show what diversification looks like.
Diversification is, at its simplest, a way to describe owning multiple types of investment assets.
Diversification strives to smooth out unsystematic risk events in a portfolio, so the positive performance of some investments neutralizes the negative performance of others.
For example, one of the biggest investments people make in their lifetimes is purchasing a home.
However, a home is but a single piece of property with a very specific geographic location in a single city/town.
This could be considered very risky because what if the area floods or becomes less popular or the home collapses.
This is especially important if you own real estate in the future. The best way to account for these scenarios is not to worry yourself sick but to diversify.
Such as contributing to a tax-advantaged account like a 401k orIRA or both!
If your house goes down in value, but your stocks go up. You now have diversified the risk and offset any losses with gains.
Alright. I got it.
Long term investment. Diversify.
You’ll also notice that I have M1 Finance as a type of account on that list. I list M1 Finance because it’s the single best and FREE way to invest automatically. Something I am obsessed with.
A set-it-and-forget-it approach!
And yes, it is truly FREE! This is not a trick. Also, using my link benefits both of us.
We both earn FREE $10. Not bad right?
Their easy-to-use platform is great for new investors. It’s rated the #1 platform for beginner investors.
If you want to just “play” around. Robinhood is another great option.
It is FREE as well.
However, they do not offer joint accounts, trusts, custodial accounts and IRA accounts at the moment.
Tax advantage investments (Roth IRA, IRA and 401k) should be maxed out before dipping into additional investments.
What moves the Market?
When you ignore the things the media blows out of proportion on a daily basis, the movement of the market can be explained by three components.
- Productivity growth
- Short-term debt cycle
- Long-term debt cycle
Technology is getting better, faster and we’re constantly learning from our mistakes. We will always be able to do more with less time and resources than we were able to in the past.
That is productivity growth in a nutshell.
Short-Term Debt Cycle
This is defined by a growth period and then a recession period. These cycles last about 5 – 8 years and explain why you always feel like the market is booming and busting (because it is). The short-term debt cycle peaks when loans become more expensive (interest rates go up).
Following a “crash” or dip, the interest rates will reset at a low level. Starting the cycle over again.
What causes the short-term debt cycle dip?
It’s caused by payments of debt in the market exceeding the income in the market. This causes a recession, otherwise known as negative growth.
Long-Term Debt Cycle
This is similar to the short-term debt cycle only much bigger and it takes much longer to play out – typically 50 years. Consider September 2008 before Lehman’s collapse as the peak of the long-term debt cycle.
The long-term debt cycle peaks when the economy is saturated with debt and it literally cannot take on any more.
Why are you telling me this?
I am telling you this because it’s important to understand that the market works in cycles.
It will constantly go up and down, up and down. Once you know and understand the market you can stop fearing it and start using it to your advantage.
The one truth is that in the long term, productivity will go up. This is why investing for the long-term is important!
Investing for Beginners 101 Tip: Don’t let a dip or crash scare you away from the markets.
This graph is a 26-year scale of Procter and Gamble. As you can see, the stock has moved up and down. If we were to look at the stock over a 5 year period, it would look even more volatile!
The point is, if you look at the long-term, scoped out, you will see the stock is growing!
All you need to do is hold on the long-term and you will see results.
The Average Investor
Don’t be offended! Average is best.
The Average Investor is someone like you or me who doesn’t try and time the market – buy low and sell high.
What’s the point? It’s going up over the long term and who has the time to obsessively check stock prices?
You have a life — I have a life!
The Average Investor does not try to time the market, nor try to beat it. The Average Investor achieves long-term returns.
Luckily for The Average Investor, the market average is conservatively at 7% (10%-20% on the high end).
To see what that means, just refer to the first graph in this article. It says that if you invest a certain amount of money for 30 years, at the end of the term you should expect it to be more than 7 times larger than your initial investment.
“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”
An Average Investor is a great financial goal. Because it doesn’t involve a lot of work or stress and locks-in healthy returns over the long term.
What more could you ask for?
I called this section The Triumph of the Average Investor because the majority of the big market winners, in the end, are playing the same long-term investment strategy (including my investment hero, Warren Buffet).
Why gamble all of your money in Wall Street’s casino when the financial goal is to grow your money, not lose it all?
Why You DON’T need a Financial Advisor
Everyone wants to be the success story. Invest a few years and now you have a mountain of wealth. The truth is, that does not happen often and is very unlikely to happen to you.
That’s fine though because we know that over time and with enough patience, we can find success. The problem is when people don’t have patience -– they start to seek out shortcuts. One of the most common shortcuts is hiring a financial advisor.
There are plenty of reasons why you shouldn’t hire a financial advisor –- a few reasons why:
Nobody Cares About Your Money More Than You
Who do you think will work harder to build your wealth?
Some person you just met or yourself?
A financial advisor’s compensation is rarely tied to your success. The majority of their income is based upon the amount they get you to invest. This is a risk I care not to take!
M1 Finance is the preferred set-it-and-forget-it investment platform.
Both are FREE!
However, if you invest in ETFs or Mutual Funds, you will pay fees.
DO NOT get ETF or Mutual Fund fees confused with financial advisor fees.
They are completely different.
ETFs (Exchange Traded Funds) & Mutual Funds fees are associated with ensuring the slew of stocks held within the index continue to perform well.
The fees are very very low. The average ETF carries an expense ratio of 0.44%, which means the fund will cost you $4.40 in annual fees for every $1,000 you invest.
If you were to hire a financial advisor, you’ll still pay the Vanguard fee and then you’ll also pay the financial advisor fee. This graph below illustrates what 1% in fees looks like over the course of your lifetime.
That’s of course if you could be so lucky to escape with only 1% in fees………
Financial Advisors Don’t Beat the Market
Fact: Less than 25% of financial advisors can beat the market average (market indexes like the S&P 500)
Chances are, the financial advisor you pick will not fall into the top 25%.
Would you even be able to tell the difference between a good financial advisor if you had a chance to sit down and talk with 100 of them?
Chances are you’ll go with the best salesmen.
Invest your money yourself.
“More” better than giving your money to someone who doesn’t care and won’t beat the market either. With M1 Finance, this isn’t hard or time consuming.
No need to get fancy and we’re investing for the long term.
Start Investing Simply
Get started with a set-it-and-forget-it style investing with M1 Finance
You get FREE investing that makes traditional investment advisors anxious.
M1 Finance automatically buys the most underweight asset. Every time you sell, they automatically sell the most overweight asset.
M1 Finance free investing platform allows you to set up your ideal portfolio, and automate contributions to the portfolio. Once your default is set, you don’t have to think about it again.
They use a pie interface. Making it easy to understand and customize. It has never been easier to invest for beginners.
You can create your own pie or pick an expert pie that is already generated. They have a selection of expert pies for high, medium or low risk investors. These pies provide already allocated stocks, bonds or ETFs, and show historical performance. As a seasoned or new investor, their expert pies are perfect.
M1 Finance gives an example of a portfolio invested in the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google).
If you choose this pie you can go with an even allocation between each of the five stocks, at 20% each. But you can also change the allocation within the pie.
For example, if you want 35% each in Google and Amazon, you’ll then have 10% each in Facebook, Netflix, and Apple.
You can also create pies based on market sectors like healthcare, utilities, and even foreign countries.
The Average Investor’s Commandments
If a 7% return is average, then the average is pretty awesome. Fortune favors the bold.
1. Think Long-Term
When you look at investing, it’s very rare for a sudden move in price to mean very much. Unless something cataclysmic happens, things will balance out. Be patient.
2. Invest What You Can Afford
While you can always sell your investments, it would be better if you left them alone and let them grow. Invest as much as you can while reducing the chance you’ll need to sell your investments to cover basic expenses. The goal is to always keep a few months expenses around in case something happens (emergency fund) and invest the rest. Invest only what you can afford!
3. Buy What You Believe In
Don’t listen to the radio, don’t listen to a friend, listen to yourself. If you do not know or understand what you’re buying, don’t buy it. Even if you do understand it, only invest in something that you personally believe in.
4. Do Your Own Research
Maybe you love cakes but if you don’t understand the cake business. You either figure out how it works or don’t invest in it. Is the cake business profitable? Are they innovators or just people milking an existing product line? You get the point. Do your own research!
We’re not day traders here, so we’re not going to try and be like them. I invest in the future and my style reflects that. The goal is to automate the investment process so you can spend your time living, not managing money. You have heard it many times throughout. Set-it-and-forget-it.
6. Consistently Contribute
The truth is, very few people can perfectly time the market. You might strike it lucky a few times, but it will quickly lead to losses. That’s OK though because you can beat it with Dollar Cost Averaging. Consistently contribute every month to your investments and it won’t matter if you buy at the peak or bottom of the market. He who can stay the course wins.
7. Be Fearful When Others Are Greedy
The first half of my favorite quote from Warren Buffet. When everyone is a winner you should be concerned. If you or your friends are making quite a lot of money very quickly with your investments, act very conservatively.
8. Be Greedy When Others Are Fearful
The best time to buy is when the world is on fire. Don’t be delusional, be realistic. Are the fires real or just the typical knee-jerk reaction of the media? We’re bargain hunters, not suckers.
9. Find and Remove Frivolous Fees
Rule: A bank will always try to trick you into paying fees. Be vigilant and tireless when it comes to reducing your fees. When the stakes are highest, so are the fees. Even a 1% fee can become significant over the long-term.
If it can fail, it will fail. That’s why we always plan ahead for failure. Diversification is your investing 101 cheat code for riding the market. Invest in many different things so no single failure can ever shut you down.
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