Welcome to the world of investing. It’s a scary world. Walk in with your hard earned dollars and pray the company you pick doesn’t declare bankruptcy tomorrow. The beauty of it is you don’t have to invest in one single company. Heck, you don’t even have to do the research half the time. Nobody’s strategy is the same, but every aspect of it has a risk factor. For example, you can lower your risk by purchasing index funds or ETFs instead of individual stocks. Lower it even more by purchasing bonds, and even more by just holding on to your cash. The safer you get the less of a reward you earn. That’s why people invest, some people do it to beat inflation. While others do it to make their money work for them.

Know Your Strategy:

What are you investing for? Have a real conversation with yourself (or a professional). What is your term? Short? (less than 1 year) or are you holding for the next decade? What will you do if the market dips 50%? Do you have an exit strategy? If you are investing for the long term, a small dip in the market shouldn’t make a difference. A decade from now it will just be a small bump in the road.

Make a plan and don’t let the noise distract you. A great investing tip is that it doesn’t matter when you buy, as long as you’re consistent with buying. This strategy is called dollar cost averaging. In this strategy you are spreading your buys into smaller pieces, in both the good days and bad. Even if you don’t research or just ignore all the news as long as you trust your initial investment you should come out on top.

Let’s say you start dollar cost averaging and you buy a security at the initial price of $30

• Month 1: 30
• Month 2: 35
• Month 3: 25
• Month 4: 27
• Month 5: 33

You purchased 5 shares for a total of $150. 150/5 = 30. Your average cost per share is $30. Seems fair right? You bought some shares on rough months, and you bought some shares on good months. Now your initial $150 principal on month 5 is worth $165. You could have panicked and sold on month 3 for a huge loss, but you kept it consistent and believed in your initial investment.

Keep in mind that there could also be losses. Only put in money that you’re willing to lose. If you’re investing in riskier securities it’s your responsibility to stay updated on market trends.

Index Funds:

What is an Index Fund? Think of an index fund like a big basket of individual stocks. You buy your right to a piece of pieces of a share of stocks. For example, VFIAX invests in the top 500 US companies. Index funds are a bit different to stocks as they require a minimum investment. $3,000 for this example and can only be traded at market close (4pm Eastern Time).

ETFs

ETFs are Exchange Traded Funds. Some ETFs are alternative ways to buy index funds. These can be traded on any brokerage at any time the market is open with as little as $1. One ETF is VOO which is the alternative to VFIAX. (reminder that these are just examples not recommendations, you can always do research on what funds fit your lifestyle/needs by doing a simple search online) On their website you can see all the securities they hold and their market valuation. The best part is that these funds are all managed electronically, so combine this with dollar cost averaging and you’re set up with an easy passive investment.

Fees

Keep in mind, although a really easy investment. ETFs will charge fees yearly. This is called an expense ratio. These expenses are taken out of the funds gains/profits. You won’t get a bill in the mail in a year demanding a payment. Keep this number in mind when selecting a fund because the higher the expense ratio the lower your profits will be.

There is a also a difference between Actively managed funds and Passively managed funds. Actively managed funds are managed by actual people and passively managed funds are managed by rules set on a computer. The fees on both can be drastically different. Actively managed funds are usually always more expensive and they often require a large initial investment.

Weighing the Pros and Cons

ETFs are a great way to stack money when you’re indecisive. Since these funds are managed automatically, any negative trends won’t really make a difference since they will be outweighed by the gains.

Let’s say you have a fund with company A,B, and C. Company A goes out of business. Your fund will automatically adjust and will probably do just fine since company B and C are still doing really well. Company A will be removed from the fund and replaced with Company D.

Every fund is different and that’s why you should look around for one that fits your investment goals and even outlook on life. Do you like green energy? There’s a fund for that. Do you like real estate? There’s a fund for that. There’s even funds that invest directly into real estate called REITs.

It’s important to stay diversified but don’t over complicate things as it will only make managing your finances more difficult. ETFs make it really easy to stay diversified while lowering your risk. Just stick to your strategy and ride the wave to wealth!

You can read more on some definitions above
Expense Ratio
Dollar Cost Averaging

Thanks for reading and see you next week!
– Pablo