Investing has never been easier, yet never more confusing.<\/p>\n\n\n\n
Whether you want to invest in stocks, ETFs, mutual funds, or real estate<\/a>, it\u2019s best to start with the basics and the foundational investing principles. In this quick guide, we\u2019ll help to demystify how to start investing by covering four areas:<\/p>\n\n\n\n How much do you know about the\u00a0basics of investing<\/a>? Let\u2019s start with the fundamentals.<\/p>\n\n\n\n If you\u2019re going to invest<\/a> in stocks, diversifying your stock portfolio keeps your investment assets from being too heavily weighted to one specific company. Recall the tech bubble or the financial crisis. If you were invested in a tech stock in 2000 or a bank stock in 2008, you probably lost your shirt (and more).<\/p>\n\n\n\n In investing, consider buying a diverse mix of stocks across different sectors to help shield you from concentration risk and to spread the risk of losing your money. Simply put, it\u2019s the same concept as eating a well-balanced meal or not putting all your eggs in one basket!<\/p>\n\n\n\n The best way to implement a diverse portfolio of stocks is to split the pool of money you have into small chunks, no more than 5% of your total, and allocate each of these chunks to a different stock.<\/p>\n\n\n\n If you don\u2019t have enough dollars to invest in a diverse set of stocks, some brokerage firms allow you to buy slices of stocks. For example, if you can\u2019t afford to buy 1 share of Amazon stock for $3000, you can still buy a slice of it through what\u2019s called fractional investing.<\/p>\n\n\n\n If you think you can make the right trades at the right time, you must choose the right stocks at the right price and at the right time.<\/p>\n\n\n\n Recall in early 2020 when most of us didn\u2019t see the \u201ccovid-crash\u201d coming. Many sold their investments when fear struck a deep chord, and stock prices were at their 52-week lows. Then the market sharply recovered, leaving those who sold low behind.<\/p>\n\n\n\n Think about the market like a roller coaster. If you buckle up and ride it out, you will most likely end up fine. But what happens when you try to hop in or out of it while it\u2019s twisting and turning?<\/p>\n\n\n\n Here\u2019s a simple example: if you invested $10K in the S&P 500 from January 1, 1999, to Dec 31, 2018, your investment would be worth $29,845 if you stayed fully invested. If you missed the top 10 days of performance over this 20 year period, your account would be worth $14,979. If you missed the top 30 trading days over this period, your account would be worth $6,316.<\/p>\n\n\n\n Missing just a few of the market\u2019s best days can significantly hurt your investment returns.<\/p>\n\n\n\n Predicting the winners and losers is a fool\u2019s game. If you\u2019re already invested, don\u2019t let market volatility control your emotions and seduce you into panic selling. Day trading may sound like a sexy thing to do, but when\u00a095% of all traders fail<\/a>\u00a0to generate positive returns, it\u2019s really not so hot.<\/p>\n\n\n\n As opposed to timing the market, time in the market over the long term is what matters. That means buying then holding as the market goes through its cycles.<\/p>\n\n\n\n Why is that so important? Because returns compound over time. Compounding returns is like math magic. The longer you stay invested, the greater the opportunity for growth on top of growth.<\/p>\n\n\n\n For example, if you invested $1,000 earning 6%, after 25 years, you\u2019ll have about $4,300. If you added an extra $10 per month to the account, after 25 years, you\u2019d have nearly $11,000.<\/p>\n\n\n\n By starting to\u00a0save and invest<\/a>\u00a0early, you can benefit sooner from this math magic. And over the course of decades, compounding growth can make a huge difference.<\/p>\n\n\n\n Do you know how much risk you\u2019re willing to take to achieve a certain level of return? Risk tolerance essentially means how much risk you\u2019re comfortable taking or flipped the other way, how much investment loss you are willing to stomach.<\/p>\n\n\n\n Your age, income level, time horizon, and financial goals are examples of key factors that go into your overall risk tolerance.<\/p>\n\n\n\n For example, if you\u2019re in your 20s, not worried about losing your investments, and don\u2019t plan to touch your money for a very long period of time (i.e., 10+ years), you are likely an aggressive investor willing to stomach greater loss than someone in their 50s, looking to retire early<\/a>.<\/p>\n\n\n\n Time horizon is how long you\u2019d need to keep your money invested<\/a> in meeting your financial goals, such as buying a house, saving for your child\u2019s education, or retiring comfortably. If your time horizon is a year, you shouldn\u2019t be investing in super risky investments. If you do, you risk a huge portion\u2014if not all\u2014of your original investment amount (or principal).<\/p>\n\n\n\n And ultimately, it\u2019s your risk tolerance that determines your investing plan and asset allocation.<\/p>\n\n\n\n Asset allocation means the optimal combination of different asset classes within your portfolio. An asset class is a group of investments that have similar characteristics. Stocks or equities, bonds, cash, real estate are examples of different asset classes.<\/p>\n\n\n\n Think of it this way: apples and grapes are considered fruits, and broccoli and carrots are considered veggies. Fruits and veggies are hypothetical asset classes!<\/p>\n\n\n\n Stocks and real estate tend to be riskier than bonds and cash, so if you have a high-risk tolerance, your investments or portfolio will hold a higher allocation to those riskier asset classes.<\/p>\n\n\n\n There are a growing number of investment options available to investors today. And we understand that it\u2019s not easy to sort through them all, so we\u2019ll cover the most common options that most new investors consider.<\/p>\n\n\n\n The key difference between stocks and funds is that funds have many (often 100+) stocks as holdings. Funds are more diversified than single stocks, and as such, they are an excellent choice for a new investor.<\/p>\n\n\n\n There are two different types of funds: mutual funds and exchange-traded funds (ETFs). For long-term investing, both of these types can do the job. The most important key difference between the two are:<\/p>\n\n\n\n But here is the main thing you should look for in mutual funds and ETFs if you\u2019re starting to invest. Invest in those mutual funds and ETFs that track an actual index, such as the S&P 500.<\/p>\n\n\n\n Why does this matter? Because research has shown that professional money managers and funds that try to beat an index underperform on average. According to Morningstar, only a quarter of all stock-picking funds have actually beat their index rivals\u2019 average over the last 10 years. So if you can\u2019t beat the market, buy the market.<\/p>\n\n\n\n To help you choose your investment carefully (i.e., due diligence), Finnyvest (by Finny)<\/a> is an easy-to-use tool that calculates a \u201cFinny score\u201d for each stock or funds you research. The Finny score removes subjective opinions in its calculation and uses the same set of criteria, such as cost, valuation ratios, and performance, across all stocks and funds it scores.<\/p>\n\n\n\n There are as many investment strategies in today\u2019s investing world as there are types of cereal at your favorite grocery store. For the sake of simplicity, we\u2019ll cover the two dominant schools of thought: value and growth investing.<\/p>\n\n\n\n Value investing is a strategy for identifying cheap or undervalued stocks based on financial ratios. In contrast, growth investing focuses on companies expected to grow at above-average rates compared to the market.<\/p>\n\n\n\n One of the key parameters value investors use is the price-to-earnings ratio (P\/E ratio). It\u2019s a metric that helps investors determine the market value compared to the company\u2019s earnings. The P\/E ratio shows what the market is willing to pay today for a stock based on its earnings.<\/p>\n\n\n\n Growth investors tend to favor younger companies poised to substantially grow their revenue and earnings in the future. When evaluating stocks, growth investors look for historical and future earnings growth and several other parameters.<\/p>\n\n\n\n Both growth and value investors may (or may not) rely on analyst price targets. A price target is when an analyst believes a stock is fairly valued relative to its earnings. When an analyst raises their price target for a stock, they generally expect the stock price to rise. But keep in mind that analysts are not always very good at predicting stock prices! So, think twice before basing your decision on a price target.<\/p>\n\n\n\n If there is one thing we want you to remember about investing in single stocks, it\u2019s this:<\/p>\n\n\n\n Stock performance<\/a> is not a result of any single factor (e.g., revenue growth, price target, etc.).<\/p>\n\n\n\n If this were the case, making stock predictions would be easy. Instead, revenue growth, price target, or price-to-earnings ratio are only three points on a long list of factors impacting single-stock performance.<\/p>\n\n\n\n So then, how do you choose your investments? Here is the raw truth: selecting stocks or other investments is more of an art than a science.<\/p>\n\n\n\n Sometimes you get ideas from friends and family members, and other times you pick them up on the internet or check out a\u00a0screener<\/a>\u00a0that gives you some good investment candidates.<\/p>\n\n\n\n But whatever method you choose, make sure you do your own due diligence<\/a>.<\/p>\n\n\n\n The reality is, when it comes to selecting a broker, there is no shortage of good options.<\/p>\n\n\n\n Mainstream brokerages such as Fidelity Investments, Charles Schwab \/ TD Ameritrade, and Vanguard are excellent choices. These powerhouses are more than just brokerage firms. They are one-stop-shops for your investing (and occasionally banking) needs across your retirement and taxable savings accounts<\/a>.<\/p>\n\n\n\nHow to Start Investing<\/h2>\n\n\n\n
Key Principles of Investing<\/h2>\n\n\n\n
1. Diversification Matters<\/h3>\n\n\n\n
2. You Can\u2019t Time the Market<\/h3>\n\n\n\n
3. Stay Invested Over the Long-Term<\/h3>\n\n\n\n
4. Know Your Risk Tolerance<\/h3>\n\n\n\n
Understanding Your Investment Options<\/h2>\n\n\n\n
Stocks vs. Funds<\/h3>\n\n\n\n
Choosing Your Investment Strategy<\/h2>\n\n\n\n
Value vs. Growth<\/h3>\n\n\n\n
Choosing an Investment Broker<\/h2>\n\n\n\n