Investing 101 — Part 1
I am writing this to help nieces/nephews and younger cousins in their 20s and 30s to get a head start with investing. I wish I had started sooner as there is a massive benefit from starting early. There is a lot of confusing information out there about investing, some good, some not so good and some that can lead to ruin, so I’m hoping to put this out there to help with the initial process of getting started. The most important thing is to just get started and at this point not worry too much about the details.
Also the reason I am targeting those of you in your 20s and 30s is because past this age I am uncomfortable giving general advice. In your 40s and 50s you have fewer up and down market cycles ahead of you, so its hard to say if things will smooth out. There are also lots of different liabilities that you are dealing with, making each situation unique.
My plan is to give some action items (a to-do list) of what you need to do to get going along with some with background information and investing “wisdom”.
ToDo: Open a brokerage account
I use Vanguard (www.vanguard.com) in the US and there is an equivalent one in the UK (www.vanguardinvestor.co.uk) for UK investors. For the US the minimum is $1000, but I would recommend trying to put in at least $3000 in a general savings account, if you can do so.
(NOTE: If you already have a U.S. 401k retirement account from your employer and you are not making the maximum employer match contribution, do that first. You can skip this step in that case. But if you are already maxed out on the 401k employer match contribution, then I think it is worth opening a separate brokerage account).
In addition to Vanguard, there are other options also such as Charles Schwab, TD Ameritrade, E*Trade and Fidelity in the US. Their minimums are lower, typically $500. You can google “online brokerage” to get a list of brokerages. Any of the top 5 brokerages will be fine for what we are trying to do.
Basically a brokerage account is like a bank account but for stocks and bonds. You will typically fund it with some cash by transferring it from your bank account. That money will go into a money market account and from there you can invest into various stock and bond funds, or individual stocks. I’ll walk through where you should put it at a later stage, but step one is to open the account.
Do it now and message me if you have specific questions.
What is Investing? (And what it isn’t)
I like the little illustration below because a lot of times people really do confuse investing with entertainment. The idea that you will pick the next Apple, Amazon or retire in 3 years off Bitcoin is not what this is about. Stick to your day job to make money, learn skydiving for entertainment and let your savings be the boring turtle that eventually wins the race.
The idea is to put away a little bit every month, automate the process and not think about it. There is actually a lot of behavioral psychology behind investing and I’ll try to talk about that in another post. For now, if you want to act on stock tips and have some fun, set aside $1000 and use that money to feed that beast. You will be better served by keeping your main investment portfolio to well diversified broad market investments.
The Impact of Compounding
To really understand why (at least in the realm of investing) boring and long term works, it helps to understand the two charts below. They both have to do with the impact of compounding.
The chart immediately below shows that impact of putting away $100 per month starting at age 25 vs. putting away $200 a month starting at age 45. Almost all of the gain comes not from what you save but from the compounding — and that’s at a fairly conservative 7% rate.
The illustration below is even more interesting. What this says is that if you put away $5000 per year for 10 years from age 25 to 34 and then don’t invest another penny, you will end up with more than you would if you put away $5000 every year for the next 30 years after that. In fact you end up with $170,000 more at the end ($787,000 vs. $611,000). This is pretty amazing when you think about it.
Hopefully, I’ve convinced you to at least get started. I will go though some more things, such as what funds you should invest in, why you should ignore the day to day market movements, the importance of diversification and other things, in subsequent posts.