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“I want to invest, but I have no idea how.”

“No one ever taught me this stuff, where do I get started?”

“What stocks should I buy?”

“How much should I invest? How much money can I make?”

“I’m afraid of losing money.”

If you have these questions and concerns, this one is for you. If you are comfortable with your investing process already, send this to someone who isn’t.

My first “investment” was $1,000 in a weed stock in 2018 (thanks for the stock tip Chase), because I thought Canada’s marijuana legalization would send it to the moon. Did I look at its valuation? No. Did I look at its financials? No. Did I care about US expansion plans? No. My thesis was simple: weed legalization would make stocks go up. I was right, initially. The stock doubled, so I bought $2,000 more. It then dropped by 75% LOL.

I was a junior in college, and I really didn’t know anything about investing. I don’t want you to be like 2018 me. Investing is the most effective way to grow wealth over time, but our education system has failed to teach us how. Investing can be quite simple, but it is intimidating if you are just getting started. There is a ton of information out there, and you can get lost in the sauce. Once you cut out the noise, investing is pretty straight forward. Check it out.

Where to Invest?

To buy stocks, you have to open an account with a brokerage.

Brokerage accounts = Investing; Checking accounts = Saving

Personally, I use TD Ameritrade. However, there are plenty of options that include E-Trade, Charles Schwab, Fidelity, and even Robinhood. You can go to any of these company’s websites, add your personal and bank information, and start investing right now. The three basic brokerage accounts are taxable (regular) accounts, Roth IRAs, and traditional IRAs (note that Robinhood does not offer Roth or traditional IRAs).

Roth IRA

Opening a Roth IRA is one of the most important decisions you can make. You can contribute up to $6,000 a year between a Roth and regular IRA, but the tax benefits typically favor using a Roth, especially early in your career. See this post for a detailed breakdown of Roths and IRAs.

You want to max out the Roth IRA before investing in a regular account due to the tax benefits: no capital gains taxes and no taxes on withdrawals. The catch is that you can’t withdraw the money before retirement age (without a penalty). You can invest any leftover cash in regular accounts.

Roth 401k

Your employer also probably offers a 401k plan. You can open a 401k or a Roth 401k, just like with IRAs. Stick with the Roth right now. You need to figure out the details of your employer’s plan and see if they do a 401k match. My employer matches 50% of my Roth 401k contributions up to 6%. This means that if I invest 6% of my salary in my Roth 401k, my employer will contribute an additional 3% of my salary for free. So far, I have received $5,000 in *free* money from UPS thanks to the 401k match. You are leaving money on the table if you don’t invest what your employer is willing to match.

Taxable Account

This is the regular, basic brokerage account. You can buy and sell whatever, whenever. If you have leftover money that you want to invest, put it here. Just know that if you sell for a profit, you will owe taxes on those profits. If you hold the stock for over a year, the taxes are lower than if you sell under a year. Again, invest here after maxing out your Roth.

Summary:

• Open a Roth IRA and contribute $6,000

• Use your employer’s Roth 401k and contribute at least what they’ll match

• Leftover money can be invested in a taxable account

What Do I Buy?

ETFs for index funds. ETF stands for “Exchange Traded Fund”. These securities are actually a bundle of stocks that mirror an “index”. The S&P 500 is the primary index in the US. This index consists of the United States’ 500 biggest companies like Apple, Amazon, Google, and Microsoft. SPY and VOO are two ETFs that mirror the S&P 500, while QQQ mirrors the NASDAQ 100 index, a tech-heavy group. Pour all of your investing money in these index funds. If you want to keep it simple, go all in on SPY. Why?

Because stocks only go up, or at least the S&P 500 does. The S&P 500 averages ~9% returns per year. If you keep investing year in and year out, you’re going to make money over time. If you annually invest $6,000 in a Roth IRA and $4000 in your Roth 401K, you will have $3.4M in 40 years. Check the table below.

That’s compound interest, baby.

Should you buy individual stocks?

No. At least not right away. You are practically guaranteed to make money over time through index funds. You throw money in the machine, and you never have to think about it again. Making money in individual stocks is time consuming and difficult. It can wear on you psychologically trying to determine if you have made the right investments (me with KPLT this week. RIP). Don’t trade guaranteed returns for the slim chance of outperformance.

What if I’m certain I can outperform the broader market over time?

You probably won’t, but if you’re like me you still want to try. Allocate a small percentage of your portfolio to your own active trades. If you start consistently producing positive results, you can scale up your allocation over time. Investing heavily in ETFs up front ensures that the majority of your wealth continues to grow, regardless of what you do with the rest.

How Much Should I Invest?

That’s up to you. If you max out your Roth IRA and take a company matched 401K contribution every year, you’ll be fine for retirement. Anything beyond that is up to you. Make $100,000+ in investment banking, but only plan to spend $30,000 a year? You might invest $50,000 total instead of the $10,000 in my example. Have a major expense coming up (house, car, engagement ring, etc.)? Keep extra cash on hand to cover your purchases.

If you invest heavier earlier, your money will grow faster. That being said, don’t focus so much on saving money that you forget to have some fun along the way. It is okay to spend money sometimes.

You want to be better off financially than 95% of America?

• Open a Roth IRA and contribute $6,000

• Open a Roth 401k and take your company match

• Invest both in SPY

• Put the rest of your “investing” money in a taxable account and buy SPY

• Don’t go too crazy with individual stocks

• Keep enough money in the bank to live your life

Congrats, you’re a personal finance expert. Follow those six steps, and you’re set for life. Investing seems intimidating at first, but it doesn’t have to be. If you have more detailed questions about investing your money, feel free to text, call, or email me.

Have a great Thursday,

Jack

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