I’ve been thinking about how to approach “investing” in the Empower community. Truth is, I’ve got strong opinions about what is “good” investing and what is not - but opinions are like…well, you know...
My opinions are largely based on my experiences, my knowledge of finance and my risk tolerance. So - as with most things related to personal finance - what is “good” for me, is not necessarily going to be “good” for you - it’s personal. I'm going to provide as much information as I possibly can about what works for me and hope that it helps you decide what works for you.
First - saving and investing are two very different things. (You need to have both savings and investments and I detailed the differences between the two here). And - an investment is an asset or item acquired with the goal of generating income or one where the value will grow over time. (This will be more than one post, so if you have questions along the way, please ask and I’ll add it to the next one)!
The Stock Market
Let’s make sure we’re starting on the same page:
Stocks - a document sold by a company that represents ownership in the company. A company may sell these to raise money for operations or growth.
Shares - the units that stocks are sold in (i.e., the number of shares equals the amount of ownership, generally)
Exchanges - the supermarkets where stocks are sold. There are exchanges for different types of stocks (and other investment types), all over the world.
Stock market (or “the market”) - general term that refers to all of the exchanges and all of the stocks sold on them.
A Little Story
Once upon a time, only rich people had access to the stock market. It was difficult to access the exchanges unless you had a ton of money. You had to have an account at a brokerage firm (or house”), to buy and sell stocks. And since brokerage houses were essentially the “middle man” between the people buying and selling, they wanted to buy and sell for rich people and institutional investors (we’ll talk about those another time). The more stocks they traded, the more money that they made in fees and “small” investors, regular people weren’t money-makers. So we got shut out.
In time, it became easier for the average person to open brokerage accounts. Rather than having to buy thousands of dollars worth of stock, brokerage began to allow individuals to purchase regularly, in small increments in order to slowly invest. But - by then, the damage was done. People tend to associate the stock market and investing with something complex and difficult. And maybe, at one time, it was. But now, it's open to everyone who is willing to be consistent and learn just the tiniest little bit about investments.
How I Invest in the Stock Market
Here's the part where we get to pure opinions. Because I can't advise you on what types of investments are going achieve your long-term goals. I don't know how much risk you're willing to take, how long you have until you need your investments to pay off, what you might be afraid of deep down. All of those things will (and should) affect how you invest. But I can share my philosophies on investing in the stock market and lead you to some of your own conclusions.
First off - I don't invest in individual stocks. You can read more about that here but the short version is that I have no interest in sort through the more than 630,000 publicly traded companies worldwide to try to choose the one (or ten) stocks that will be successful. I only invest in mutual funds (or ETFs).
Mutual funds come in all flavors (like stocks). You can choose a healthcare mutual fund and it will invest in companies that are all health-related. Or, you can invest in a technology mutual fund and it will try to find you the "winners" in the technology industry. Many mutual funds are actively managed, meaning a professional stock picker will select the companies to invest in and you will benefit from owning a little slice of all of them. These are known as "actively managed" funds. But these aren't the kinds of mutual funds I invest in.
An index is a way to compare the performance of your investment to the overall market - to see how your stock is doing, compared to the market. Indexes can be a particular type - like tech stocks, or grouped by company size. Here are some of the more well known indexes:
S&P 500 Index - tracks the performance of 500 top companies in the U.S.
Dow Jones Industrial Average - tracks the performance of 30 U.S. companies from healthcare to technology
NYSE Composite Index - tracks the performance of all stocks traded on the New York Stock Exchange (NYSE)
Index funds do the exact same thing as the indexes- they track the market. Index funds aren't looking for the "winning" companies, they are invested in all of the companies listed on a particular index. They "follow" the market, they aren't trying to "beat" it. Honestly, there are a million reasons that I invest in index funds. I could show you the articles and the data that prove that it's the best way to invest. But really, it's the best way for me:
1. it works - index funds make the same amount (or more) than actively managed funds and,
2. it's easy - there is no guessing, no constant trading, no figuring out the market.
Investing in the marketing should be simple and it can be easy - it's not as complicated as we've been led to believe. And index fund investing is about as simple as it gets in the stock market. Based on the level of risk I'm willing to take, my research and my experiences, index fund investing is right for me. I happen to believe it's right for most folks. At the very least, you're curious and courageous enough to learn more about it. And to take the next step towards investing in the market.