I just returned from a small camping trip outside of Detroit, where my family and I rented a cabin. I intended to write another piece. However, with limited wifi at the site, I had to postpone it. I had a chat with my brothers and our friend about investing and thought about sharing a little bit of what I know. Yes, I know that there are tons of investing articles and some written by people a lot more knowledgeable than me. I am writing this post as a bare bones introduction to those that know next to nothing, so that they may feel more confident to make their money work for them.

A Few Things Out of The Way

First and foremost, I need to say that I’m not a financial advisor, so I am not giving you financial advice. If and when you decide to invest, I recommend that you speak with a licensed advisor to see what specific things work for your situation. While investing can provide substantial rewards, it can, also, result in some financial losses.

Let’s Get Started

I will use three basic categories, for the purpose of this discussion. There could be others, but I’m just trying to keep this as simple and as basic as possible.

First, we have stocks. They are (parts) of a company. Investors buy with the goal of the price per share increasing from where you bought it. When it goes up, you could either sell it at a profit or you could hold onto it, especially if you see it as a long-term investment. Additionally, some of them issue dividends, where, at certain periods, they will issue you a check from their profits or surplus.

If you aren’t looking to hold but to sell at a profit, there are some considerations. Primarily, you may need to consider tax implications. Capital gains tax “is assessed on the positive difference between the sale price of the asset [shares] and its original purchase price.” Per Investopedia, short-term gains (selling before one year) are taxed anywhere from 10-37%. On the other hand, if you hold onto it for over one year, you may be taxed at 0-20% depending on your tax bracket. So, if you’re looking to buy some shares and cash out high but it hasn’t yet been a year, some of your profits may be lost to taxes.

Next, we have bonds. You can think of bonds as types of loans. Off the top of my head, three common parties that I can think of that issue them are for companies, municipalities and the US government. If you may recall on the news, sometimes, municipalities will request to issue bonds to help finance some kind of improvement. The resistance, when voting, is that this is debt. Typically, the income for bond holders comes from the interest generated during the bond’s term. A company, municipality, etc. may benefit from paying their issues bonds back early if interest rates have dropped. Why borrow money at 5%, if rates have dropped to around 3%.

Lastly, there are other investment vehicles that include real estate. In my opinion, these other investments are harder to understand and explain. For these reasons, I won’t explore them.

I have heard many people suggest to spread out the risk by not putting too much into stocks, bonds or those other investment vehicles. Certain distributions make sense at specific points in your life. For example, it can make sense to be more aggressive during your younger income generating years to increase profits and slowly change the distribution towards a more conservative approach as you get older.

Where Do I Go?

Back in the day, you would need a broker to buy or sell investments. Later, there was the idea that it was necessary to have someone “watching your money.” Usually, they would charge fees for their services, which, could eat into future gains. Then, companies (ex. X) started to provide online brokerage accounts, so that people could buy or sell themselves. While this happened, trading fees were seen as a concern. Little by little, those trading fees were decreased. Part of this movement was the arrival of finance upstarts like Robinhood or Wealthfront (both have mobile apps). Recently, as a reaction to these smaller companies, many of the more established financial players (ex. Schwab, TD Ameritrade) eliminated their trading fees.

So, now that you’re aware that you can invest for yourself, how do you start? You could use either individual investments (stocks, shares), mutual funds or index funds/ETFs. Since I’ve already discussed individual investments, I’ll move on to mutual funds and index funds/ETFs.

Mutual Funds

Mutual funds are groups of investments (stocks, bonds, etc.) run by money managers, who buy and sell investments to maximize investors’ profits, which come either from the shares’ value increasing or dividends being paid out.

While a money manager can help reduce the guess work, their services aren’t free, so there may be fees for managing the fund. Also, depending on how often investments are sold, this could mean having to pay more in taxes for those capital gains.

 

ETFs/Index Funds

Index funds are similar to mutual funds in that they are pooled investments. They track specific niches in the markets. Per Investopedia, they have “broad market exposure, low operating expenses, and low portfolio turnover.“ Also, if there are dividends paid out, they’re usually reinvested. In addition, while there is less turnover, when it does occur it’s to cover commissions and to get investments at the best possible price. The fact that risk is spread out and could less due to lower fees and less capital gains than with mutual funds (lower turnover), which may mean more money staying in your portfolio.

ETFs (exchange traded fund) are a type of index fund. Unlike mutual funds, the entire ETF is traded on the stock market. From what I have read, there are ETFs for any conceivable market niche. Also, they have among the lowest fees. While ETFs tend to be passive investment, this isn’t always the case. If you are looking at ETFs, you should take care to know if you are truly buying a passive ETF, when seeking one.

Investing Review

So now, we’ve reviewed the different types of investments, different ways of investing (increasing availability of online investing options), how they can be pooled, active vs. passive investing. I hope that you can take this basic information and expand on it to the degree that you wish. I tried to balance clarity, conciseness and depth. If I missed anything or incorrectly wrote anything, please reach out to me and let me know, so that I can make any necessary clarification or corrections.

There are an infinite number of investing approaches. Active vs. passive investing. Various approaches on how to structure portfolios. I suggest that you learn more and see what works for you, your life circumstances and your comfort level.

Also, before I wrap up, I would like to share some resources to help you maintain and deepen your knowledge.

• Investopedia: the name should lend a clue. I relied quite a bit on this great site to get the basic information for these terms. I have gone on it to learn more about a term and unexpectedly ended up exploring other tangents.

• Graham Stephan (YouTube channel): while he is a real estate investor, he does cover other financial terms in a way that is deep but easy to understand.

• Meet Kevin (YouTube channel): similar content to Graham Stephan. He, also, is a real estate investor.

MAKE YOUR MONEY WORK, WHILE YOU SLEEP.

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