How to Invest for Beginners | Ex-Wall Street Trader Explains Investing 101 | Your Rich BFF

Summary

In this video, the creator simplifies investing by using relatable analogies, addressing common concerns, and guiding viewers through the steps to start investing. The key points include choosing the right investment account, funding it, and selecting diversified investments like ETFs and mutual funds. The creator also highlights the importance of understanding fees, such as expense ratios, and offers advice on robo-advisors for those seeking a hands-off approach. With a focus on accessible language, the video reassures viewers that it’s never too late to start investing and that personal finance education is essential for financial success.

Takeaways

• 😀 Investing can feel overwhelming due to all the jargon, but it can be simplified with easy analogies and step-by-step explanations.
• 😀 There is no such thing as the perfect investment; everyone, from hedge fund managers to regular investors, is still searching for the best option.
• 😀 Before picking investments, choose the right account to hold them (e.g., 401k, IRA, or individual brokerage accounts). These are like online tote bags that hold your investments.
• 😀 Funding your investment account is simple—just transfer cash from your bank account to your investment account digitally.
• 😀 The fun part is picking investments. You can buy ETFs and mutual funds (index funds) to get exposure to hundreds or thousands of companies at once, which helps weather market fluctuations.
• 😀 Watch out for expense ratios when selecting funds. Lower expense ratios mean lower fees and better returns over time.
• 😀 For example, choosing VOO (with a lower expense ratio) over SPY for an S&P 500 ETF can save you money while achieving the same investment goal.
• 😀 If you're unsure about which investments to pick, consider investing in a target-date retirement fund, which tailors investments based on your age and retirement timeline.
• 😀 A simple analogy for investing: It's like shopping at a grocery store. You choose an account to hold your investments, fund it with cash, and buy a variety of investments like purchasing items in a basket.
• 😀 If you find investing overwhelming, consider using a robo-advisor. It's like Spotify for investments, creating a personalized portfolio based on your financial goals and risk tolerance, with minimal effort on your part.
• 😀 Don't let a fear of not understanding investing stop you. It's okay to start small and learn as you go—just remember, investing is essential for growing wealth over time, especially with the impact of inflation.

Q & A

What is the main struggle people face when it comes to investing?

The main struggle people face is feeling overwhelmed by the jargon and complexity of investing, especially when trying to understand what to invest in and how to begin.

Why is there no such thing as the perfect investment?

There is no perfect investment because even experienced professionals, such as hedge fund managers and billionaires, often make poor investment decisions despite their resources. The key is to focus on creating a well-diversified portfolio, not chasing the perfect stock.

What is the first step in starting to invest?

The first step is to choose an account to hold your investments. These accounts, like a 401k, IRA, or individual brokerage account, act as containers for your investments. You’ll need to decide what type of account makes sense for your financial goals and situation.

What’s the difference between a 401k, IRA, and individual brokerage account?

A 401k and IRA are specific to retirement and have tax benefits, but you can’t access them until later in life. An individual brokerage account is more flexible, allowing you to access your investments anytime. You’ll choose the account based on your goals, timeline, and financial needs.

How do you fund an investment account?

To fund an investment account, you simply transfer money from your checking or savings account into the investment account. Most platforms make this process simple and digital by linking your bank account.

What are ETFs and mutual funds, and why are they recommended for new investors?

ETFs (Exchange-Traded Funds) and mutual funds are baskets of investments that allow you to invest in hundreds or thousands of companies at once. They provide diversification, which helps protect your portfolio from individual market fluctuations, making them an excellent choice for new investors.

What is an expense ratio, and why is it important?

An expense ratio is the fee charged by mutual funds and ETFs to manage the investments. It's a percentage taken from your returns. A lower expense ratio means you keep more of your gains. For example, an expense ratio of 0.1% means you would lose 0.1% of your gains to fees.

Can you give an example of two funds with different expense ratios?

Yes, for example, SPY is an S&P 500 tracking ETF, but it has a higher expense ratio than VOO, which tracks the same index. By choosing VOO, you save money annually on fees while accomplishing the same financial goals.

What is a target date retirement fund, and how does it work?

A target date retirement fund is designed to automatically adjust its asset allocation based on your retirement date. You choose a fund that aligns with the year you plan to retire, and the fund becomes more conservative as you approach retirement age.

How do robo-advisors work and what are the benefits?

Robo-advisors are automated platforms that create personalized, diversified investment portfolios based on your financial goals, risk tolerance, and situation. They are an excellent option for beginners or those who want a 'set it and forget it' approach to investing. The fees are typically lower than human advisors, though you still pay a small fee for the service.

What is the key reason to start investing rather than just saving?

Saving alone, especially in a checking account, leads to losing wealth over time due to inflation. Investing allows your money to grow, which is necessary for long-term financial goals like retirement, as you cannot realistically save your way to wealth.

How can someone get started if they feel they don’t understand investing?

If you’re feeling confused about investing, start with a robo-advisor. It offers a simple, hands-off approach to investing, where you fill out a questionnaire about your goals and risk tolerance, and the platform creates a diversified portfolio for you.