When I first started investing with a brokerage, I had to pay for each trade ($5-$8 per trade, or something like that), but Robinhood came onto the scene and really impacted the industry by allowing free trading. This drove some of the larger, older brokerages to follow suit and cut fees as well which opened up opportunities for more people to invest. As a beginner, you’re going to get a lot of information from social media, water cooler financial analysts, and Joe Schmo who knows a guy, who has a cousin, whose uncle got rich from bitcoin.
Try to ignore the noise and keep things simple. See below for my definition of simple.
This is a portfolio that I started with my nephew, which contains only investments into Microsoft, Apple (two of the biggest companies in the world), and a couple of Vanguard ETFs (more on that later). I challenged him to auto-deposit $10 a paycheck into this account, and to increase that amount as he got older and earned more money. A simpler version of this portfolio would be to solely invest into VT, or Vanguard’s Total World Stock Market . This ETF tracks the world market index, which covers both well established and emerging markets from around the globe. I would not recommend investing into individual stocks unless you fully understand the company you invest in.
When choosing a brokerage to invest your money with, you will come across an exhausting list of options to choose from. And much to my wife’s chagrin during tax season, I’ve opened accounts with a lot of them. Your mileage may vary, but I would highly recommend Fidelity (this blog is not sponsored by Fidelity). They have plenty of low cost mutual funds, the customer service is great, the website and phone applications are easy to use, and they have a cash management feature that comes with a debit card and bill pay.
A lot of people want to wait until the “right time” to invest, and you’re going to always hear that “the time is now”. This is because history has proven that time spent in the market leads to more gains than timing in the market, or waiting until the “right time”. However, there are several scenarios where it makes sense to delay the start of your investment journey:
- You’re in a financial space where you can’t carve out $5-$10 a paycheck for investing
- You have a lot of debt, and your disposable income needs to be applied to reign it all in
- You don’t have a budget (stay tuned, we have blog posts on the schedule that will help)
- You don’t have an emergency fund
You’re going to find any number of skeptics when it comes to the market and a lot of people who will describe investing as gambling. People who hold these opinions are confusing investing with trading, and there is a difference. Trading is short term and attempts to capture a quick series of wins that equate to a rapid expansion of wealth. Investing is more long term, slow and steady, which involves more time in the market to generate wealth. It also allows you take advantage of compounding interest. Investing requires patience and the ability to ignore the ebbs and flows of the market. As I write this, the market is currently in decline, with the Nasdaq-100 (an index of the largest non-financial companies listed on the Nasdaq Stock Market) is down 12% since the end of November, and I’m cautiously hoping it drops lower. Look at it this way, let’s say you’re in the market for a Louis Vuitton Neverfull bag or a pair of Jordans. The justification for spending $1600 on a purse or $120 for pair of sneakers is beyond the scope of this blog post because I don’t understand it either, but, most consumers would jump at the the opportunity to acquire these items if they were 10%-20% off.
Some investors will panic when the market drops, and CNBC will have a field day with it because viewers will be glued to the television as commentators . Finance Youtubers/Tiktokers will published content with open mouthed thumbnails talking about “the crash is coming”. Call me crazy but I look forward to those days, because I can add to my positions and take advantage of discounted prices.
I mentioned compound interest earlier, so let’s analyze of couple of scenarios so we can visualize this a little better. Let’s say you started investing January 1, 2009 and you could only afford $50 a month. Your starting balance is $50 and you’ve committed to $50 deposits until December 31, 2021. You looked into the future, read this blog entry, and now you want to mimic my nephew’s asset allocation. Perhaps, you haven’t done the proper research into Microsoft and/or Apple, and you don’t have the time nor patience to start, but you believe that technology companies will continue to excel into the future, so you embrace VGT (Vanguard’s Information Technology ETF), which contains Microsoft, Apple, Nvidia, and a host of other tech companies). Lets run the numbers for the different options:
- Portfolio 1: VT (100%)
- Portfolio 2: VT (50%) + VGT (50%)
- Portfolio 3: VT (25%) + VGT (25%) + MICROSOFT (25%) + APPLE (25%)
And this is what $50 a month can do over 13 years due to interest compounding over that time span. And if you’re scratching your head about Mutual Funds and Exchange Traded Funds, that content is on the way. I will link to those pages once they are published.