When you make the decision to invest money, you will have lots of choices. You can buy stocks, bonds, and mutual funds. You can venture into real estate, get some cryptocurrency, or purchase gold. Despite all of the options, I decided to start investing through the stock market by purchasing index mutual funds. Here’s why:
1. No barrier to entry. Unlike buying real estate which usually requires a 5 to 6-figure sum as a down payment or a high net worth to establish yourself as an accredited investor, getting started in the stock market was fairly easy. I logged onto the online portal for my job and clicked a button to start contributing to my work retirement account. I began by investing 3% of my salary and increased the percentage every few months until I got to my target of 10%. The next year I opened a Roth IRA to purchase even more index mutual funds and was able to set it up with one phone call. Some of my friends simply downloaded the Robinhood app to get started. My point? Investing in the stock market is a simple thing to start doing. No high fees, specific net worth, or long waiting period required.
2. Doesn’t require lots of specialized knowledge. Some people choose to invest in collectibles like art or specific commodities like gold or natural gas. They purchase expensive items they believe will increase in value over time or make various investments to enhance various energy sources. Although there is nothing inherently wrong with this practice, investing in collectible items and commodities usually requires a specific skill set. If you purchase art, you must have specialized knowledge of that industry so you can understand how much the art is truly worth. If you invest in commodities like gold or alternative energy sources, you must understand when and how the item or investment increases in value in order improve the chance that you’ll make a profit and decrease the chance that you will lose money. For those like me who aren’t art gurus and don’t have specialized knowledge of specific industries, investing in commodities and collectibles may not be the wisest thing.
3. Provides tax savings and liquidity. As a young professional who invests a good chunk of my income and pays a decent amount in taxes, I want investments that can help lower my taxes each year. Along with tax savings, I also want liquidity. Although my plan is to keep the money in investment accounts for decades, I want a back-up option as well. In other words, I want the ability to take my money out of the investments fairly easily if some large, unexpected event occurred and I happened to need cash quickly.
Investing in the stock market via index funds through my Roth IRA and my work retirement account provides me with both of these perks. My work retirement account allows me to use a portion of my income to invest in index mutual funds in a way that saves me money in taxes each year. My Roth IRA allows me the liquidity I need. It allows me to take my contributions out of the account at any time serving as a backup emergency fund that can give me access to cash fairly easily if I needed it.
4. Steady growth with lower risk. Unlike folks who pick and choose individual stocks to purchase or who try their hand at stock “options” or “puts,” I invest in the stock market much differently. Instead of trying to predict which companies’ stocks will go up and down in value over time, I purchase index mutual funds. Buying an index mutual fund, like the Vanguard Total Stock Market Index Fund, means that I own a small percentage of stocks from almost all of the companies in the country. I have a little bit of Apple, a little of Tesla, a little of Google, but I also have a little of thousands of other companies too.
Although the exact value of the index mutual fund can vary a bit day-to-day, on average the total stock market index fund tends to increase in value by about 10% each year. This allows for steady growth over time with very little effort on my part. I don’t have to learn a bunch of different skills or read up on various companies. Plus, unlike those who invest in cryptocurrencies like Bitcoin, the price of index mutual funds doesn’t vary as much. This makes index mutual funds a bit more predictable and easier to plan around. With index mutual funds, I can better estimate when I’ll reach a certain financial milestone because the average growth per year is fairly consistent (usually around 10%). When it comes to my money, I like consistent steady increases.
My point? When I started investing I did so by purchasing index mutual funds in the stock market. Nowadays, I invest in a little real estate as well. But I know people who invest much differently. I have family members that invest in cryptocurrencies, friends who own gold, and college professors who collect art. We all have reasons for investing the way we do. There is no one-size-fits-all. However, for most folks looking to make their first investment, buying an index mutual fund may be a good place to start.
5 Lessons GameStop Taught Us About Investing
Over the last few weeks there has been a great deal of buzz about GameStop. In case you missed it, GameStop is a retail company that sells video games and associated equipment in shopping centers across the country. Due to the recent pandemic, many Wall Street Investors noticed that people are shopping in person less and thus predicted that the GameStop and its stock would go down in price. Some of those investors even made bets that this would happen (by “shorting" the stock).
Many individual investors on an internet forum disagreed with this prediction. In an act of defiance, they decided to buy large shares of GameStop stock and encouraged everyone on the forum to do the same thing. As more and more people bought the stock, the price of the stock increased drastically. The stock price increased from around $20 at the start of the year to over $400 at one point proving the Wall Street investors wrong and causing some of the largest investment firms to lose millions of dollars in the process. Conversely, many of these individual investors who were on the internet forum made thousands of dollars. Many people realized how much money they had made and began to sell the stock to realize their profits. As more people sold their stock, the price of the stock began to decrease. As I’m writing this article, the stock is around $60.
Here are 5 lessons we can learn from GameStop:
1. Sometimes buying individual stocks can make you a lot of money. The GameStop stock price increased from $20 to over $400 at some point. People who purchased shares of the stock around that lower number and sold it around the higher number made a substantial profit. There have been reports of people making thousands of dollars and beyond.
2. If you purchase a stock when it is already near its peak you can lose a lot of money. While many people on the internet forum who bought the stock when it was around $20 made a huge profit, many people who purchased the stock when it was near $300 or $400 were not as fortunate. Because the stock went down in price and is now around $60, anyone who bought the stock higher than this price lost a substantial amount of money.
3. Making money buying individual stocks relies on good timing and good luck. Some people made a lot of money by purchasing the stock and some people lost a lot of money by purchasing the stock. Which group you may fall into if you choose to buy individual stocks depends on many factors, but two of the biggest factors “good timing” and “good luck.” None of us can predict the future, so despite how good we think our guesses may be, making money by purchasing individual stocks has a great deal of risk. Who could have predicted that people on an internet forum would buy stock in a struggling company and cause the price to increase over 600%? Who could have predicted that the price would decrease to $60 less than 2 weeks later? A lot of the profit people make buying individual stocks requires them to buy the stock and sell the stock and just the right point and timing these two things can be challenging to say the least.
4. The prices of stocks can change drastically. In this situation, the price of GameStop stock ranged from $20 to well over $400 and the change happened in the span of weeks. Although changes to stock prices don’t usually have this wide of a range, this situation was a good illustration of a key investment principle: prices of stocks can change and some stocks are more volatile, and likely to have these types of changes more frequently than others. This can be great news for investors who are able to “time the market” and happen to buy the stock at its low point, but this can be hard to do. Stock prices change for myriad of reasons that you can’t always predict.
5. Stock prices aren’t always based on the company’s financials and overall value. GameStop prices changed a lot over the past few weeks, but this change wasn’t based on something that the company itself did. In fact, nothing about the actual business of GameStop or its financial outlook changed. Yet, despite this, the stock price fluctuated a lot. Although this worked out well for investors in GameStop who made profits, the fact that stock prices can change may not be so good for other companies who are more successful. In fact, it isn’t uncommon for successful companies to experience a drop in their stock price despite increasing their revenue and doing good from a “business sense.” Since a company’s stock price isn’t always based on the company’s financials, this makes it more difficult to predict which stocks will earn you a profit and which will not.
My point? Buying individual stocks is risky. You have the potential to make a lot of money, but you also have the potential to lose a lot of money. What actually happens for you depends a lot on luck. To avoid having to rely on good luck, I invest in index funds. This means I own a little piece of all the stocks. This strategy gives me steady profits and also minimizes risk.
Think twice before you buy individual stocks
I don’t actively trade or buy individual stocks, much to many of my friends’ surprise. I mention several reasons why in another blog post, but the main reasons are that:
It takes a lot of work to try to do it correctly
Accurate, timely information on individual companies can be difficult to find
It requires a substantial amount of research on various companies and industries.
The market is volatile and the purchase of individual stocks is too risky
I keep my investing simple by purchasing well-diversified index mutual funds. The index funds lower my risk of losing money and increase my chance of making money. They also increase the odds that I will make a substantial return on my investments over time.
However, I had a few people reach out to me and question this strategy. They asked “if investing in index funds means you purchase all the stocks, then that means you own both good companies and bad companies. Why not just purchase all the good companies individually?”
My answer was that “It’s not that simple.” Let me explain why.
Good company does not mean good stock. In other words, just because you hear of a “good company” like Apple or Microsoft that does not mean buying stock in that company will make you money.
You make money by purchasing stock in a company and having that company’s stock increase over time. Unfortunately, even if a company is good and profitable, that does not mean buying stock in that company will make you money over time.
A company’s stock price is not determined by that company’s value. Some well-run companies can have low stock values and some poorly run companies can have high stock values.
Stock prices are volatile and change quickly based on a variety of factors. If investors think an industry will do poorly over the next few months, their stock price may go down, even if the company itself is doing very well. If investors think a company’s stock is overpriced, they may start to sell that stock which may drive the price down, even if the company itself is still doing well and making huge profits.
Plus, even if a company is doing well and its stock price has increased recently, that does not mean its stock price will continue to go up in the future.
Sometimes a bad company can have its stock price go up (making you money) and a good company can have its stock price go down (losing you money).
It’s hard to predict what will happen.
Picking the right stock relies too much on luck. It is not dependent on skill, intelligence, having the “right” advisor, or extra knowledge. Because it’s so hard to know which companies will have stock prices that will go up over time, buying individual stocks is like gambling in a casino. Although you hope to make money, you can’t predict what will happen. Even if you got lucky and made money initially, that does not mean you will continue to be lucky and make money in the future.
It’s too risky. I’m not sure about you, but I don’t like to lose money. I want to invest in a safe way that will still give me a good return on my investment over time.
I invest in index mutual funds. By purchasing funds like the Vanguard Total Stock Market Index, I am nearly guaranteed to make about 8-10% profit on my money each year. Each year, this return on my investment will continue to increase and compound. This will build my net worth.
4 Reasons I Don’t Buy or Trade Individual Stocks
Over the last few months, many of my friends have started investing. Because they know I love talking about personal finance, they will often ask me advice on which stocks to purchase. I tell them all the same thing: “I don’t buy individual stocks, I only buy index funds.” They usually seem a bit perplexed and want to know why. Here’s my answer:
1. It takes a lot of work and timely information is difficult to find. As a busy doctor, I don’t have a lot of free time. Some weeks I work 80 hours in the hospital or have over 20 patient message to review. I barely have time to fold my laundry on a regular basis let alone do extra work, outside of work. When I do get a free afternoon or “golden” weekend in which I’m not on call at the hospital, the last thing I want to do is be productive. Most of the time, I just want to relax with friends and family eating good food or enjoying quality time. Trading stocks or researching companies to invest in, isn’t on my priority list.
Even if I did have the desire to learn more about various companies, finding good, timely, information can be quite challenging. Most of the time when information about a company is finally published it has already been known to Wall Street investors beforehand. This means it’s almost too late to make an investment decision that could make you money. For example, if I turned on the news and heard that Facebook was acquiring another company that could increase its profits, chances are the price of Facebook stock would have already increased to reflect this change. By the time lay people like you or I tried to capitalize on this potential increase in stock value it would be too late.
2. It requires substantial research on each industry and company. Although apps like Robinhood and Akorns have made purchasing individual stocks easier, they haven’t necessarily made it more profitable for the consumer. In order to actually make money when you purchase stocks you need to purchase companies that will increase in value and do so in a way that you will still make money even after you pay the taxes on your profits. This may sound easy to do initially. You may be thinking that you’d just purchase stock of Netflix and Facebook or Tesla and Apple then call it day. Unfortunately, it’s not that simple. If it were, everyone would do that.
There are some companies that seem to grow exponentially in ways we could never expect and other companies that seem to implode overnight. It’s difficult to predict which ones will make money over time and which ones will not. In fact, Wall Street companies spend millions, if not billions, of dollars each year on market research to help provide more information to help them make better predictions and investment choices. Even they still struggle to choose the right companies year after year.
3. The market is volatile and things change quickly. If 2020 taught us anything, it’s that life can be unpredictable. Random unforeseen events that happen in other parts of the world can affect us in ways we could never have imagined. These effects not only impact our daily lives, but they can have drastic effects on our economy and the success or failure of certain businesses.
Before the coronavirus, many of us would have assumed that airlines and travel industries would do remarkably well in the summer. The weather is great, kids are out of school, and most people have time off of work to go on vacation. We all got a rude awakening in March when the coronavirus pandemic put a drastic halt to almost all leisure travel and many airline industries found themselves on the brink of bankruptcy. Past performance isn’t always indicative of the future valuations and this makes picking and choosing individual stocks to purchase quite risky. Which leads me to my last point…
4. It adds too much risk and I don’t like losing money. When you buy individual stocks you’re essentially rolling the dice and hoping that the company’s stock you purchased will increase in value over time. As we mentioned before, stock prices are volatile. A company’s stock could be worth $20 today but then drop to $5 tomorrow due to some global tragedy or company scandal that you had no idea about. They best way to mitigate risk and decrease your chances at losing money (and increase your chance of making money), is to diversify your investments.
This means purchasing stocks in a variety of different companies from a slew of different industries. Since it would be too cumbersome to individually purchase all the stocks, most people such as myself, just buy index mutual funds. An index fund does the work of buying all the stocks for you. That way, your investments are diversified in a seamless, stress-free, risk-averse manner.
5 reasons I’m still investing in the stock market during the Coronavirus
With the Coronavirus pandemic, many cities across the country have shut down. While some people are working from home, many others have been furloughed or lost their jobs altogether. With this rapid decrease in economic activity, the stock market has taken a huge hit. Many people who had a big chunk of their network in stocks, have seen a sharp decline in the overall value of their investments. In the midst of all of this change, I’m staying the course. Here are 5 reasons I’m still planning to invest in the stock market:
1. I’m in it for the long-haul. Despite the low valuations of stocks at the current moment, the market will eventually recover. While the value of stocks may not bunce back in a couple months, over time the market will normalize. Since I haven’t sold any stocks, I haven’t actually lost any money. Unlike people who are close to retirement, I’m young and have just started my career. I have lots of working years left and don’t need the money I put into retirement accounts any time soon. By the time I retire, 20-30 years from now, stocks will be worth a lot more than they are right now. Thus continuing to invest in the stock market will increase my net worth over time.
2. It’s difficult to time to the market. Some investors my argue that since the market hasn’t recovered yet, people should temporarily stop investing money and wait until things recover to resume investing. I disagree. While that strategy sounds plausible on the surface, it’s difficult to implement in practice. Despite our best knowledge, it’s hard to “time the market.” No one really knows when the stock market will hit its lowest point and when it will be on the upswing. If you mistime it, which is highly likely since we don’t have a crystal ball telling us the exact date things will improve, you run the risk of buying stocks for much higher than you otherwise would when you start investing again and end up “losing money.” Since most of us don’t need money from our retirement accounts right now, we should keep investing as we wait for the stock market to rebound.
3. The price of stocks is cheap right now. With this economic downturn, many companies are not operating at full capacity or bringing in as much revenue as they once were. As a result, the economic value of these companies has decreased. Since the valuation is lower, the price of their stocks is lower. This is great news for me because it means it’s cheaper to buy stocks. Although I don’t invest in individual stocks, I can still get more bang for my buck through index mutual funds. Before the coronavirus, a few hundred bucks a month might have only allowed me to get a small percentage of stock in each of the major publicly traded companies. Nowadays, those dollars go much further. It’s as if I’m buying a lucrative investment at a discount. When the market finally does bounce back, the value of my investment will have increased exponentially. Since I can’t time the market to figure out exactly when the stocks will be at their lowest price (or available for purchase for the biggest discount), I “dollar-cost-average” and invest money each month into an index fund so that on average I will have gotten these stocks at a decent price.
4. It lowers my taxable income and student loan payment. Regardless of what the market does over time, continuing to invest in stocks through my employer benefits me in the short term. Since I mainly invest in index mutual funds (a portfolio of all of the stocks on the market) through my employer’s retirement fund, doing so lowers my taxable income. This means I don’t pay taxes on the money I invest towards retirement and thus less money is deducted from my paycheck for taxes each month. Since I pay less in taxes I will have more cash to spend after each check. Plus, lowering my taxable income by continuing to invest in my job’s 403b/401K also lowers my monthly student loan payment since my payment amount is a percentage of my taxable income. As someone who’s loans will be forgiven in 10 years, paying less each month for student loans means I pay less on my loans overall before they get forgiven entirely. This is a win-win.
5. I can write off the losses. There is no doubt that we are in the midst of a recession. As we continue to practice social distancing, companies are unable to operate at full capacity and their stocks may continue to decrease. This means that those near retirement may need to sell part of their stock portfolio to continue to fund their retirement, and thus may end up selling it for less than it was previously worth. While this may sound disheartening, there are certain things that can be done to minimize the burn. One of them is the fact that we can write off the losses against our taxable income. If you happen to sell some stocks at a loss, you can deduct that loss from your taxable income next year, if you itemize your taxes. Meaning a loss in value doesn’t really become a true loss. You get to recoup some of that money next year when you file your taxes.
My point? Despite the market downturn, I’m still planning to invest in the stock market. Doing so allows me to buy valuable stocks at a discount, lower my taxable income, increase my net worth over time and lower my student loan payments. I’m investing for long-haul and these benefits motivate me to stay the course.