Introduction Into investing
Imagine planting a seed into the ground, and with time it grows into a tree. A wonderful tree made of money. Well, that’s kind of how investing works, but of course there is more to it than that. However, that may not always be the case.
The first thing I’d like to dispel is the notion that investing is only for the rich or “educated.” It’s not. Anyone can invest, and in the not-so-distant past, the retail investor was everywhere; our goal is to bring that back. Like our little tree, investments are a way for us to make money over time. Now, I should preface that all investments are a risk one way or another. Even though some risks are so minor that we can effectively ignore them, they still exist.
You might be asking, why do people invest? It’s a fair enough question: why would people be willing to risk their hard-earned money in this market of stocks? Well, that’s simply due to the power of compounding growth.
Let’s say you invest a modest $10,000 and earn a 9% year-to-year return for about 10 years. Lucky you! As you can see, that $10,000 has had a 2.3x return in the matter of only 10 years without any additional contributions. It goes without saying that the larger it gets, the greater the returns, and on and on.
Let’s dive into this lucrative world and learn about growing our wealth. Investments can take virtually any form—stocks, real estate, bonds, even a car can be an investment, although I wouldn’t personally recommend it. If you’d like to explore the full list, I’d heavily recommend checking out the investment heat map for an overview of what most investments entail. In this section, we will primarily discuss equities, including mutual funds, stocks, ETFs, and similar investment options.
Now how do we start? Well, first you’re going to want to pick a brokerage of your choice (a brief comparison of the most popular ones is listed here.) Once you’ve decided which one best fits your needs, you’ll want to find the investment that best fits you. Now, this part can vary a lot from person to person, and I hope by now you’ve at least taken a peek at that investment heat map and have an idea of what you might like to invest in. A good baseline, I’d say, is VT or VOO, but of course it’s your decision, so be sure to do a lot of research and make sure it’s the right one for you.
To help you find investments, let's review these two. Firstly, in this instance, both investments are ETFs, which means they come with lower fees; VOO mirrors the S&P 500, while VT mirrors the global market.
VT offers greater diversification, meaning less volatility and an overall greater safety; in essence, you are betting on the global market. As for VOO, because it mirrors the S&P 500, it follows only the top 500 companies in the American market, meaning it's more vulnerable to the swings of the market.
In recent years, VOO has outperformed VT by a considerable margin. While historical returns of your chosen investment should be important, don't obsess over them. A crucial lesson to take to heart is that prior performance is no indicator of future performance.
Consider your risk tolerance and your ability to maintain composure during periods of economic uncertainty. It's difficult to watch your portfolio go down the drain, but in most cases it is imperative you keep a level head and ride out the wave; markets will more often than not recover, but the choices you make are permanent.
Here is where your investment comes into play. In the case of VOO, volatile markets are certain in the long run, so it is important that you are confident that you will make the right choice when the time arrives. VT is not immune to volatility, but it will be less impactful, and losses will be smaller (in most cases).
These are just a few of the many things to consider when making your portfolio.
While stocks like VOO and VT are popular investment choices with a higher growth potential, many people like to supplement their portfolio's diversity by also investing in bonds. Bonds are, in essence, debt being taken on by the issuer over a set period of time in return for interest. Depending on the issuer, bonds can be some of the safest investments, especially the 10-year treasury bond, which many people use as a benchmark for various financial aspects, including mortgage rates.
Of course, there are many types of bonds with many different issuers, but we will be looking at the safer, lower-yielding bonds as a way to supplement your portfolio. Many people like to split their portfolio between stocks and bonds. In many cases your split is a representation of your goals and future plans. In some cases young investors push for a 90/10 or even a 100/0 split as a way to quickly accumulate wealth while they are young and ride it out over a period of time, but for our purposes we are going to be looking at what most consider to be the baseline split of 80/20.
There are many ways to invest in bonds; you can buy them directly from the issuer, like in the case of U.S. Treasuries via government websites. Or you could buy them from a brokerage firm in the form of an ETF, further diversifying your portfolio. Provided are two examples of ETFs: BND owned by Vanguard and AGG by BlackRock. Both ETFs share similarities, primarily composed of treasury bonds, with their respective splits of corporate and mortgage-backed bonds. AGG serves as an alternative to all the Vanguard ETFs mentioned earlier in case they are not your preferred choice.
Although right now our make-believe portfolio is currently an 80/20, it is important to consider your risk tolerance and how much you're willing to "risk."