Investing** is one of those concepts that will invoke a strong reaction. Some people love it and are thrilled by the markets. Other folks recoil in horror just thinking about all those symbols that crawl at the bottom of their tv screen. The majority of people who do not invest are simply avoiding it. They have every reason under the sun why they can’t/won’t. Sometimes it’s money and sometimes it’s myths. DIAR is helping you find the ducats but we also need to dispel a myth or 4 to get folks into the game. Time to separate the facts from the fallacies. Let’s do a little myth-busting on investing.
Here are the top 4 myths about investing:
- You need a lot of money – Back in the day, a broker’s car valet probably wouldn’t even take your call if you didn’t have at least 5 figures to invest. Nowadays, the game done changed. You can get started investing for $1 at a few brokers (I know for certain Schwab and Fidelity). I know you got a dollar in the cushions of your couch. While we’re at it…clean those cushions fam!
- Stocks are too risky – I hate to be the bearer of bad news but life is risky. Our parents were forever talking about getting hit by a bus because we didn’t wash the dishes or thaw out the chicken or something. Risk is a part of life. When putting together our portfolios, we are going to make sure we are at a comfortable risk tolerance. Risk can never be avoided but it can be minimized. A thought to ease your mind: the stock market as a whole has NEVER lost money in any 25 year period.
- Investing takes too much time – I can hear some of ya’ll now: “I don’t wanna read the Wall St Journal, it doesn’t even have color pictures!” or “Is CNBC just NBC for Canadians?” Technical analysis is a bore. Who wants to study P/E ratios or comb over 10-K statements? If that’s your thing, more power to you. Luckily now, thanks to index investing and robo advisors, you can manage a portfolio in the time it takes to fire off a tweet.
- I’m not smart enough - It is common to fear what you don’t understand. However, it is not cool to miss out growing your money. Don’t worry if you’re not a Wall Street ace. Learn the basics and you’ll be in a great spot to make excellent portfolio decisions.
We’ve cleared up the myths, now let’s get to the good stuff. Investments can range from stocks to art to collectibles to coins to stamps. It’s a broad category. Nine times out of 10, when DIAR covers investing, we are talking about stocks/bonds/funds. To ensure no one is left behind, I want to use a little space to talk about the basic investments that will be in your brokerage account:
- Stock (equity): A stock is a partial ownership in a company. For example: if you own stock in McDonald’s, you theoretically own a piece of the company. Does that mean you can sashay into any location and demand McNuggets? Sure, if you have the money to pay for them. Otherwise, no. There are two main types of stock: common and preferred. Common stock has shareholder voting rights, preferred do not. Preferred stock is higher up on the debtor chain. If Mickey D’s goes bottoms up, preferred stock holders will get paid before common stockholders.
- Bond (fixed income security): Think of a bond as an IOU, a loan made by an investor (you) to the government or a company. Entities need ducats to finance new projects, keep the lights on, refinance some own debts, so they will issue bonds. The bond issurer will set the terms of the bond. This includes things such as terms, interest, and maturity date. Bonds are typically pretty steady. You won’t see the volatile swings that stocks are prone to have.
- Mutual fund: A company that pools money from investors and invests the money in an array of securities. Mutual funds are sold in shares and each share represents the investor’s ownership in the fund. The neatest thing about a mutual fund is it offers instant diversification. For example: Mighty Morphin Investment Group decides to start up a mutual fund called X-Min that will only buy stocks whose ticker starts with X. Weird flex, but okay. There are currently 13 stocks on the New York Stock Exchange that start with the letter X. (I counted because I like ya’ll). Buying each one share of these stocks individually would run you over $400. Yikes! But thanks to the X-Min you can own a fraction of all the stocks for the fund’s minimum investing of $100. Yes for $100, you can own all 13 stocks. Ain’t that a steal?
- Exchange Traded Funds (ETF): It’s a pretty close cousin of the mutual fund. ETFs are bundles of securities that are pooled together into one “super stock”. This super stock is traded on major stock exchanges. The biggest difference between a mutual fund and an ETF is how they are valued. Mutual funds are valued at the end of the trading day and ETFs are valued while the markets are open.
We’ve now covered the basics of investing as well as crushed any myths about doing so. In the next part of investing basics, we shall talk about constructing a portfolio. Get comfortable about the markets. Stay away from sites that promise you the next Apple or Amazon. Investing in a marathon, not a quick run down the block. Investing may seem daunting, but DIAR is here to help qualm any fears. Don’t be scared, you got this!
What say ya’ll? What are some lessons you learned about investing? Are there any other barriers that keep folks from the markets? Hit the comment box. Let’s discuss.
**Investing in this post refers to growing money outside of retirement accounts. Investing, as it is used in this post, refers to a taxable brokerage account.