A common misconception is that investing requires choosing individual stocks. Upon speaking with my patients, friends, family, and coworkers, I’ve learned that what’s stopping many people from investing is not knowing how to invest! In reality, you do not have to buy individual stocks, in fact, I suggest you don’t. I would suggest passive investing in a diversified index fund such as the S&P 500 which represents the 500 largest companies in the US.
Investing should and actually is a lot more simple than you’d think. First, let’s differentiate between active and passive investing.
I want to preface this by saying I would not suggest active investing but it’s important to understand what it is prior to discussing what you SHOULD do. Most anything you put money into that you believe can provide a return is considered an investment. In the investable universe you could buy stocks, bonds, derivatives, currencies, precious metals, real estate and so on. Someone who actively invests spends a lot of their time researching potential investments. Individuals who actively invest might also try to time the market and buy on a day when the market drops so they are buying stocks at a lower price. Likewise, active investors try to sell on days when the market is doing well so they can sell at a high price. Do you guys see how much work this is??? It’s nearly another full time job to manage your personal investments actively. I don’t know about you, but I’m all about working smarter, not harder.
Clearly, there is a steep learning curve to investing actively. The top echelon of investment managers will beat the market most years by a percent or 2 however these professionals work on teams and dedicate their professional life to learning these tactics. Even Justin, who works for an institutional investment management company, does not invest actively with our personal finances.
It’s never a good idea to go into investing believing you can outsmart the market. This can lead to analysis paralysis. The complexity of the market makes it unreasonable for an average individual to outperform the market consistently over the long-term.
I don’t suggest you invest your personal money this way. You know the saying “you can get 80% of the way there by doing 20% of the work”, well in this case you can get 99% of the way there by doing 1% of the work…. by using the principle of PASSIVE investing.
I highly suggest taking this approach to investing. Think of passive investing as driving an automatic car. Most of us buy automatic cars because it’s easy and why would we want the hassle of learning how to manually shift when we have a much easier alternative. The same concept goes for investing. Passive investing is the idea of buying an investment, holding onto it for the long term, adding more each paycheck, and watching your wealth grow.
Passive investing works best when you buy into diversified funds rather than individual companies. This concept is a lot less sexy than buying and selling individual stocks every other day but it’s much more realistic for the individual investor.
How I Invest
I personally try to keep it very simple. I’m invested 100% in equities (stocks). Many people believe it’s important to also own bonds because they help diversify your portfolio, however over the long term, in my opinion, they should return less than equities and, at my age, I can withstand the volatility that comes with a 100% equity portfolio.
Traditional 401k – S&P 500 fund through Fidelity. If you would like to learn more about opening a 401k, please check out my blog here.
Roth IRA – VTI, a total market ETF, through Vanguard. A total stock market fund encompasses small, medium, and large cap companies, weighted by market cap (company size), meaning the larger companies have a larger weight. If you would like to learn more about opening an IRA, please check out my blog here.
HSA – S&P 500 fund through Fidelity. The HSA is a very powerful tool with incredible tax advantages, to learn more, read my blog here.
Brokerage – SCHA, a small cap ETF, through Schwab. This ETF specifically invests in smaller companies.
I say it all the time but you do not need to be rich to start investing. It is investing that will help you to get rich. Erin Lowry is a fantastic author who also simplifies investing in her book “Broke Millennial.”
Purchase Broke Millennial Takes On Investing: A Beginner’s Guide to Leveling Up Your Money on Amazon here, I highly suggest it!!
I hope after reading this blog, you have a better understanding of why passive investing is the easiest place to start. It will save you so much time and effort and will still provide you the same returns. You are accepting risk by investing BUT the S&P has historically increased by 8-10% over the long term. If you want to learn more about investing, I wrote an investment 101 series which you can find under the “finance” section here.
Are you a fan of passive investing and buying and holding? Let me know in the comments below!!