Investing For Beginners

An investment is an effort or action where you reasonably expect to get a future reward or return.

Investing is a broad category that includes finance. Compound interest doesn't just apply to money, it also applies to investments in knowledge, health, and relationships. 

An investment in knowledge pays the best interest (Ben Franklin). Time is not our most valuable resource, truth is. True knowledge is our most valuable resource because it allows us to make good use our time. 

There are guarantees in life including opportunities, challenges, and choices. Each new day is a new trek with new opportunities. Gaining new knowledge helps us to better manage our opportunities and challenges, and make better choices. Gaining new knowledge from other people can save us years of personal experience. 

This page is a summary of the best information I have learned from years of gaining knowledge from finance experts and self-education on finance. If you get nothing else from this page, please understand that investing in the stock market is what I believe to be the best financial investment the average person could make. If you cannot afford to pay a professional financial investor to manage your stock market investments, you can probably set up your own individual retirement account (IRA) with a brokerage. If you manage to do this, the financial experts John Bogle (founder of Vanguard and the first index fund) and Warren Buffett (cofounder and CEO of Berkshire Hathaway) recommend investing in a low fee index fund. More on that later.

Personal finance is basically how an individual manages their money, by knowing where their money comes from and what it does. There are many things people can do with their money, if they have the knowledge.

The financial industry is very profitable, and therefore, a very competitive industry. Be very careful investing your money. The finance industry could be considered a "zero sum game" where there is a limited amount of money and investments available at any one point in time, and there are many smart people attempting to gain as many good investments as they can.

That may feel discouraging, however, the financial industry has a specific structure, including written laws, deliberate systems and processes, along with unwritten natural laws of human nature, and the sooner you learn and apply the structure of financial investing, the more possibility you have of seeing a better return on your financial investments. In other words, the financial industry is bound by laws that you can use to increase your investments, or make your money work for you.  

Understand some banks, credit unions, and investment companies have some federal insurance (FDIC or NCUSIF) to protect a certain amount of cash investments in savings, checking, some trusts, and CDs. Not all investment organizations provide such insurance, and money invested in stocks is not insured.

Why invest in stocks at all? The average annual stock market returns are roughly 8-10%, depending on the market and the time frame. I'm not saying that is what you will get investing in stocks, but it is more than just keeping the money in a savings account. Most savings accounts have annual returns way lower than 8%. The last I checked, there are only a few banks offering high yield savings accounts between 2-5% annual returns.

Almost anyone can set up and manage their own personal or business stock market investment account with a brokerage. Personal accounts include a regular cash account, or a retirement account, including the popular Roth Individual Retirement Account or Roth IRA. What makes the Roth IRA different is that qualified withdraws from the account, during retirement age, are tax free, or tax exempt.

A personal Roth IRA retirement account requires people to keep the money in the account until they reach a specific retirement age, if they want to get the tax free benefits. If they withdraw money from the account before then, they pay extra fees. Get the details from your brokerage.

A personal cash investment account with a brokerage allows people to deposit and withdraw anytime without any extra fees, just the normal fees the brokerage may charge, and taxes, as it does not have the tax benefits of a Roth IRA, but you are not expected to keep it invested until retirement age. If people can afford to do so, they might consider their own IRA and cash investment accounts.. 

The three main types of stock investments are individual stocks, mutual funds, and exchange traded funds (ETFs). Mutual funds and ETFs are collections of many individual stocks, which involves some level of diversification. Mutual funds are usually bought and sold by certified financial professionals, for their customers, during premarket and post market times. Exchange traded funds can be bought and sold by individuals during normal stock market hours (9:30 am to 4:00 pm, Eastern Standard Time). Stocks are tracked and traded by their "ticker," which is a one to five letter symbol that represents the stock performance of a publicly traded company.

Funds have the benefit of being diversified among many different stocks, so if one or even two publicly traded company's stocks crash, the loss to the fund will be minimal. A few popular ETFs are the QQQ that reflects (indexes) the Nasdaq, the SPY that reflects the S&P 500, and the DIA that reflects the Dow Jones. Note, there are other index funds with lower fees, these are some of the more popular.

Funds have specific goals, like reflecting (indexing) a specific stock market, or to invest in stocks of specific companies that are in a specific industry like precious metals, real estate, or foreign companies. Some funds invest in stocks of companies that have a high ESG rating or companies that are more environmental, social, and governance conscious. Some funds invest in stocks from companies within a specific size and category like large value stocks, or small growth stocks. Value stocks are usually less volatile and provide smaller but more stable returns. Growth stocks are often more volatile but provide larger returns when they do rise in value.

Morningstar is a popular stock research company that created the Morningstar Style Box. Their Style Box classifies stocks in nine areas considering their size and category. The three sizes of stocks are small, medium, and large (based on their market capitalization). The three categories of stocks are value, growth, and blended. 

There are three main stock markets which are the Nasdaq, the S&P 500, and the Dow Jones. Each of these markets show companies that have "gone public" and made their stock open for individuals to invest in. Stock exchanges are the infrastructure that allows people to invest in the stocks on the stock markets. Brokerage companies are the link between individuals and the stock exchanges, that allow people to set up their own stock retirement account or stock "cash investment" account.

Popular brokerage companies that allow individuals to invest in the stock market include, Charles Schwab, TD Ameritrade, Vanguard, Fidelity, Merill, E Trade, and Ally. When comparing a brokerage company consider their customer service, fees, and whether they offer two factor authentication login (2FA). A 2FA login provides a second layer of protection in case your password is compromised or intercepted by a keylogger or public video camera. 

When comparing a professional finance expert, or broker, consider their certification, or their past performance. There might be some online databases where you can check an individual finance expert's certifications, or check and see if an individual finance expert is currently under investigation or involved in litigation. Some finance professionals have a “fiduciary” responsibility, which is basically a legal or ethical responsibility to put your interests above their own. Some brokers have combined fiduciary responsibilities to their clients and a responsibility to their brokerage. 

Some financial experts don't recommend investing in individual stocks, usually because the stock prices go through cycles of gains and losses, often depending on external circumstances. Most people get emotional and sell stocks when it is near a low price in the cycle, fearing it will drop lower. Many people also get emotional and buy stocks when it is at a high in the cycle, thinking it will continue to go higher. This buying when the price is high and selling when the price is low is a good way to lose money in the stock market. Investment experts recommend to either buy when the price is low and sell when the price is high, or buy and hold the stock through down cycles, because the markets eventually rebound.

Investing is basically buying and holding for the long-term, at least many months. Trading is buying and selling short-term or medium-term. Day trading is buying and selling each day, while swing trading is buying and selling short to medium-term (a few days, weeks, or months). It is my understanding that the United States has rules about day trading, referred to as Pattern Day Trading. This requires you to have $25,000 in an account to day trade.  

If you want to invest in individual stocks, some financial experts recommend investing in companies that you like, and think of it as a partnership. Most finance experts and brokerage companies include in their disclaimer that past investment performance does not guarantee future performance. However, in some cases, past performance of stocks may be a good indicator of future performance, as a common phrase in the trading world is, “Trade the trend." There are also some technical analysis indicators that can help understand where a stock is in their price cycle. Doing some basic fundamental analysis and technical analysis, with good indicators, can help understand where stocks are in their cycle.

Many wealthy people like to invest in stocks that pay dividends, which can be referred to as fixed income investing. Dividends are recurring payments from the company to all stockholders for each share of stock, regardless of whether the stock goes up or down. These dividend payments are often small, but add up if you own a lot of shares, and hold them over time. You can get an idea of how much your annual dividend returns will be for your investment amount by checking the dividend yield. The dividend yield is the expected annual percentage of dividend returns on your investment. 

Consider that most savings accounts in a bank do not pay very much interest on money invested in them. There are many stocks and funds that pay dividends of more than two percent interest annually, on money invested in them. There are even some stocks that pay dividend yields over five percent. However, many times the higher dividend yields are often stocks with lower, or even negative, performance over time. Brokerage companies often give you the choice to automatically reinvest dividends that are paid to your account, which can help to compound your investment over time.

When comparing funds to invest in, people should consider their goals and especially consider their fees. The ETF fees are usually expressed as a percentage and labeled as an "expense ratio." If you prefer investments that pay dividends then make that a consideration also. Many finance experts claim even a fraction of a percent of fees can make a big difference in returns over decades. 

If you have a considerable amount of money you want to personally invest in the stock market, consider the fact that despite the market continuing to rise over time, there are stock market cycles. If you can manage to invest a large amount somewhere in the low end of a cycle, your return on investment, over time, will be larger than it would be if you happened to invest it in the high end of a cycle. You can get an idea of where the market cycle is by observing the different time periods, with a few different indicators.

There are some online websites that have virtual stock exchanges or "paper exchanges" where people can practice stock market investing. These practice exchanges provide an online account with a virtual $100,000 cash investment. The platform then mirrors the real stock market investments with a time delay. The investments on the virtual stock exchange, with the virtual money, will reflect the performance of the actual stocks and funds on the real markets. A few popular virtual stock exchanges include WallStreetSurvivor.com, HowTheMarketWorks.com, and MarketWatch.com/games. Those virtual stock exchanges offer the option of making your virtual account a stock market game where you compete with other people. There are a few brokerage companies that offer real stock market investing and virtual "paper" investing to practice with.

There are a few brokerage companies that allow people to invest in the stock markets and in the relatively new crypto currencies, including Robinhood, Interactive Brokers, Tradestation, Webull, and FTX. In case you have not heard, FTX is currently going through a bankruptcy and time will tell if it ceases to exist or if it gets reorganized and survives. FTX was a popular and more advanced investment platform/company.

I have not learned much about crypto currencies. I know that many financial experts don't like crypto currency, mainly because the only value most crypto currencies are based on is people just agreeing they have value, or the inherent scarcity (if the crypto is truly limited or capped). However, many wealthy people have also made a lot of money investing in crypto currency. 

You can invest in crypto directly, or invest in stocks or funds that invest in crypto. There are two main ways to invest in crypto directly, either buy and store it online in a "hot wallet" or software wallet, or  buy and store it offline in a "cold wallet" or hardware wallet. Some popular hardware wallets include the Ledger Nano, Trezor, Ellipal Titan, and Safepal. With either a software or hardware wallet the crypto exchange should provide a "seed phrase" with the initial crypto purchase that allows people to restore a hacked, destroyed, or lost crypto wallet. The seed phrase should be kept in a very safe location. Some hardware wallets connect by radio frequency (Bluetooth, WiFi, or NFC), and some connect by a physical connection (USB port), but there are some hardware wallets that are 100% "air gapped" and can't connect to the internet by radio wave or a physical cable. These hardware wallets communicate by a camera and QR codes.

Back to the stock markets... The following screenshots show the performance of the ETFs, QQQ (Nasdaq index), SPY (S&P 500 index), and the DIA (Dow Jones index). The first screenshot shows about a five year period including the drop/loss in 2022. The second screenshot is just the 2022 January to December losses.

Notice how the QQQ/Nasdaq (blue line) had the most gains during the up cycle, but also had the most losses during the down cycle. Notice how the DIA/Dow (red line) had the least gains during the up cycle, but also had the least losses during the down cycle. Notice the SPY/S&P 500 (purple line) was the more moderate of the three. Some stock market experts recommend using the S&P 500 as a benchmark or guide to assess how your personal stock market investments are performing. 

Dave Ramsey 

Founder of Ramsey Solutions, and The Ramsey Show, and author of Baby Steps Millionaires, Financial Peace Revisited, and The Total Money Makeover. Key advice includes follow a budget, have a $1,000 emergency fund in cash, start the debt snowball (to pay off debt), save for 3-6 months of expenses, and invest in a retirement account with mutual funds through a financial professional. Money management is 80% behavior and 20% knowledge, act your wage and stay out of debt. Put compound interest to use. Day trading or investing in one stock, or a few stocks, is not advised. Investments should be more diversified.

Robert Kiyosaki

Founder of Cashflow Technologies and author of Rich Dad Poor Dad, Rich Dad's Cash Flow Quadrant, and Rich Dad's Guide to Investing. Key advice includes our greatest wealth is our education or knowledge. Many people are highly educated but still financially illiterate. Make your money work for you by investing in real assets that grow. In some cases, real estate might not be an asset, and debt can be good if you invest the debt and it makes more in returns, than it charges you in interest and fees. In other words debt is only good if it is used as an investment that makes more than it costs. 

Morgan Housel

An economics graduate and former writer for The Motley Fool and The Wall Street Journal. A partner at the Collaborative Fund, a venture capital firm. Author of the very popular book The Psychology of Money, and his more recent book, Same as Ever. Everyone has an incomplete view of the world, but we often fill in the gaps. Define the cost of success, to you, and be ready to pay it. People have very different goals and desires. Learn to be okay with goals not going as planned. Morgan’s investing strategy doesn’t rely on picking the right sector, or timing a recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades.  

Warren Buffet

Founder of Berkshire Hathaway. Key advice includes, invest in a low fee, S&P 500 index fund, and hold it. If you must invest in individual stocks, buy ones from companies you like and hold them like a partnership. Day trading is dangerous because most people can't seem to successfully predict what the markets will do, and they struggle to control their emotional desire to buy high and sell low, when they should buy low and sell high.

John Bogle

Founder of The Vanguard Group and author of The Little Book of Common Sense Investing. His book explains how many  investors make mistakes and why most people would do well to invest in a low cost (low fees) index fund, like an Exchange Traded Fund (ETF) that indexes a stock market. His book also talks about Bond Market Index Funds. The book explains how fund fees and costs matter, along with taxes. The last chapter of his book has some good wisdom including... While there is risk with investing, choosing to invest in an index fund brings down the risk because funds are diversified. Not investing ensures an unsound financial future.

Ray Dalio 

Founder of Bridgewater and author of Principles, and Principles for Dealing with the Changing World Order. Key advice includes spending less than you earn, and diversify your financial investments. He also recommends having clear goals, accurately identify and diagnose problems, design a plan, and do what's necessary. Foster an environment of confidence and fairness with clear principles, and implement best practices, so conclusions can be assessed with logic and data. Emotions are not helpful in making important decisions.

Peter Lynch

Was one of the most successful Mutual Fund Managers during his career, and author of One Up on Wall Street. His book explains that the average person has more knowledge about businesses/brands than they think they do. He even makes the case that in many ways some average people could have more knowledge in one industry than some financial professionals who try and keep up on all the different industries. His book explains ways that can help the average person pick their own stocks and create their own financial portfolio, including details on the different categories of stocks and their specific risks and rewards.

Tony Robbins

Founder of Robbins Research and author of Money, and Unshakeable, and Life Force, and Awaken the Giant Within. Key advice after interviewing and learning from the best investors… Be obsessed with avoiding losses, rewards should significantly outweigh the risks, know how to invest in a way that is tax efficient, and diversify. Other non money advice includes, give more than is expected, treat people fairly, and never take advantage of anyone, or hold them back in their progress, and “Losers react; leaders anticipate."

Dave Ramsey... 

Baby Steps Millionaires

The Total Money Makeover

Financial Peace Revisited

Robert Kiyosaki...

Rich Dad Poor Dad

Rich Dad's Cash Flow Quadrant

Rich Dad's Guide to Investing

Morgan Housel

The Psychology of Money

John Bogle

The Little Book of Common Sense Investing

Peter Lynch

One Up on Wall Street

Tony Robbins...

Money: Master the Game

Unshakeable

The Holy Grail of Investing

Other popular personal finance and investing books...

The 5 Lessons a Millionaire Taught Me by Richard Paul Evans

Secrets of the Millionaire Mind by T. Harv Eker

The Millionaire Mind by Thomas J. Stanley

The Millionaire Next Door by Thomas J. Stanley

A Beginner's Guide to the Stock Market by Matthew Kratter

Richer, Wiser, Happier by William Green

I Will Teach You to Be Rich by Ramit Sethi

The Art of Money Getting by P. T. Barnum, (free at https://www.gutenberg.org)