36 minutes | Nov 2nd 2020

#068 | 5 Simple Steps to Investing

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Before we get into the specifics, let’s do a recap of how investing works and why it’s critical to financial independence. 

Investing in the stock market is essentially buying pieces of companies. This is overly simplified, but you can buy an individual stock, so a share of Apple. You can buy a Mutual Fund, which is a bucket of investments managed by someone else. Or you can buy an ETF or Exchange Traded Fund, which is a piece of many individual stocks across the whole stock market, or industry, etc.

The stock market is based on buying and selling, driven by what investors believe is a specific company’s future value. When there are more buyers than sellers, the price goes up. When there are more sellers, the price goes down.

So when you buy into the stock market with companies that do well, your investment value goes up. There are always winners and losers, booms and busts, but the stock market’s history is that overall it increases by about 7% annually. And there’s this thing called compounding growth: If you make 10% on $100 in a year, that’s $10. But when you reinvest that $10, the next year, you earn 10% on $110, which is an additional $11. Over time, this is huge.

The last thing is fees: ETFs and Mutual Funds charge fees, and these can add up over time just like compounding growth. It’s a compounding fee. So look for the expense ratio detail before you buy something. The recommendations we’ll get to are both low cost.

Here are some warnings:

  1. Don’t try to time the market
  2. Don’t gamble
  3. Don’t put all your money into a small set of investments.

Here are the 5 easy steps:

  1. Apply online for a brokerage (Vanguard, Fidelity, Schwab, Trade, RobinHood)
  2. Deposit some cash, usually via ETF
  3. Pick a broad ETF like 
    1. Vanguard Total Stock Market ETF (VTI)
    2. Schwab U.S. Broad Market ETF (SCHB)
    3. Fidelity ZERO Total Market Index Fund (FZROZ)
  4. When your money arrives, go to “Trade”, select “Buy” and type in the ticker symbol.
  5. Complete your transaction by entering how many shares. Select the order type as “Market” and submit. We recommend also selected “reinvest dividends” to achieve that compounding growth.

And if this is too much, check out Wealthfront or Betterment for an even simpler way to invest.

Top 3 Takeaways:

  1. Don’t overthink it. But also don’t be too risky if you’re new.
  2. Get started today.  The earlier you get started, the better.  
  3. Continue to learn. This episode gets you over the hump, but you still need to know what you’re doing.

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Show References

Charles Schwab

Fidelity

Vanguard

Wealthfront

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Other Links

Maggie’s Blog: Mostly Minimal Life

Mike’s Book: Your New Relationship with Money

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