A family member recently told me that her good friend, a hard-working mother, wants to invest some of her income for her family’s future.
But she has no idea where to start.
What does she invest in? How does she do it? How does it work?
I don’t blame her. If you try to find the answer to this simple question online, you’ll get bombarded with nonsense, from buying Bitcoin to SpaceX to dividend stocks to expensive funds.
It’s no wonder good, honest people are so confused they don’t even start investing.
Here’s my advice to this family friend. Hopefully it helps you or someone you know, too.
What to buy
To participate in the productivity and profits of the world’s best companies without risking that a significant portion of your net worth is lost because one of the businesses fails, you want to buy a basket of ownership portions of good companies.
Such an investment is called a fund.
Specifically, today you want to buy an exchange-traded fund (ETF). This is a single investment you can buy that gives you a tiny slice of ownership in many companies (or other assets).
Historically, most wise investors would advise you to buy an S&P 500 index fund. That’s a fancy name for a fund that includes the 500 largest companies in the United States. When you buy such a fund, the largest portion of your money goes into the largest company, the second-largest portion goes into the second-largest company, and so forth. So even though you’re buying a fund with 500 companies, you aren’t buying pieces of each equally. (This will be quite important in a moment.)
That’s still an OK option.
However, we’re at a bit of a weird time in history. Because of the recent technology boom (similar to the “dot-com” boom of the late 1990s), the biggest companies have grown very large. Just 10 companies of the 500 make up around 40% of the index’s value.
This type of thing doesn’t typically last forever. Those high-priced companies, when taken together, will most likely eventually decline.
So what do you do?
You make a similar, but slightly different fund choice. Rather than buying an S&P 500 fund, which is heavily weighted toward just a handful of richly priced companies, you buy a more balanced fund that’s “equal-weighted” (you buy a similarly sized piece of many companies).
One such fund is the Invesco S&P 500 Equal Weight ETF. That fund’s “ticker” (its identifier and what you’ll search for in your brokerage account when you’re ready to invest) is RSP.
With such an investment, you’re already diversified across 500 great companies in the United States, many of which have large international operations.
It’s prudent, however, to also buy a fund of international companies in case the U.S. ever experiences a severe stock market downturn. For example, you can buy the Vanguard Total International Stock ETF (ticker: VXUS).
Right now, I’d advise a family friend to allocate about 70% of their portfolio to an equal-weighted S&P 500 ETF like RSP and 30% to an international ETF like VXUS. Others may disagree, and that’s OK. As long as you’re investing in a broadly diversified index of great companies, over the long run (10+ years), you’ll do fine.
What not to buy
Investing in many large companies over a long period is a reliable way to passively grow your wealth.
Almost every other type of investment is either far riskier (likely to cause you to permanently lose part or all of your investment) or won’t make you as much money.
Here’s a list of investments others will try to sell to you (to earn them a commission) or “teach” you how to buy (if you pay them, of course):
- Cryptocurrencies (includes Bitcoin and others)
- Investment real estate
- Individual stocks*
- Penny stocks*
- Dividend stocks*
- Private market stocks
- Initial public offerings (IPOs)
*Note: Your diversified ETF will include individual stocks. But unless you’re willing to read dozens of 200-page annual reports on each company you want to invest in and its competitors, you have no business investing in individual companies.
How to invest
To start investing, you need a brokerage account. This is like a bank account, but for holding investments in companies, including funds like the ETFs we’ve discussed.
You don’t need an advisor, accountant, or anyone else to start investing. You definitely don’t need anyone who wants to sell you training or overpriced services.
Here’s how to start investing on your own:
- Set up an online brokerage account with Schwab, Fidelity, or Vanguard
- Deposit money into your brokerage account (usually via wire or ACH from your bank account)
- Look for one of the ETF tickers we discussed such as RSP or VXUS (make sure the name matches what I’ve mentioned above and read a bit about the fund before buying it to ensure you buy the right one)
- Determine how many shares you want to purchase based on how much you’d like to invest (for example, if you want to buy $1,000 of RSP and its price is $200, you’d buy 5 shares)
- Confirm your purchase (the online brokerage will walk you through this)
- Congratulations, you’re now an investor participating in the profits produced by many great companies!
That’s it. You just became an investor.
All you have to do now is repeat the same process each month as you wish to increase your investments.
Don’t worry about short-term ups and downs in the value of your investments, assuming you’ve invested conservatively in one or more diversified funds as we’ve covered. Just keep investing a portion of your income each month, and eventually your investment portfolio will snowball.
—Matt