How to Confidently Start Investing: A Beginner’s Guide
The other night on Instagram Stories (a sentence that’s so 2022 it hurts), I asked y’all what question you’d ask a Magic Money 8 Ball (unfortunately, I’ve watched so many cartel movies that I now feel the need to clarify I’m talking about those adorable children’s toys, not a substantive amount of cocaine).
I asked the question this way intentionally: I didn’t want people to ask me questions they thought I’d know the answer to (“Ask me anything!”). I wanted to know the questions they’d ask an omniscient children’s toy that could give them a universally correct reply.
The interesting thing about this exercise was that I was expecting really off-the-wall shit, but I was surprised to find that a lot of the questions people asked were things that you could fairly simply decide using math or statistics as your guide…except for the girl who asked if her boyfriend should sell all his Dogecoin, to which I say: I don’t need math or statistics to tell you that I think the answer is yes.
Since I launched Money with Katie, a lot of people have asked how they can get comfortable with investing, or, more broadly: Should I start investing?
While I can’t sit here and say the answer is definitively “yes,” what I can tell you is that—if you’ve got your other financial ducks in a row (see below)—the answer is probably yes.
Other financial ducks include:
No high interest debt (I’d classify anything over 5%–6% as high-interest, as it means the interest on your debt could be accruing faster than any potential gains in the market, when adjusted for inflation, on average)
A decent cash cushion (though I think people cling to this step like it’s a life raft—if you’ve got more than $10,000 to $15,000 in cash, I think you’re probably overdue to start investing)
Because that’s the key thing: You don’t have to be rich to start investing. Investing is how you get rich.
But that stuff is boring and you may already know it, so let’s jump to what investing actually is
“Investing” in the broadest sense just means using your money (read: cash) to buy assets that you think will go up in value. You can invest in real estate, the stock market, and a lot of other things.
Today, we’re going to talk about stock market investing in particular (as distinct from day trading and other arbitrage attempts), as I believe that has the lowest barrier to entry. I can’t start a rental property empire right now with $20 and an internet connection, but I can use those two things to start investing in the stock market in the next 20 minutes.
What’s the stock market?
The stock market is just a big collection of companies that have decided they want money from the public in return for the promise that they’ll produce profits they’ll share with the public.
In order to be offered on this thing called the stock market, a company has to “go public”—which means revealing a lot of intimate details about how it’s spending and earning, how much it’s paying its executives, and more. Companies want to look good to the public so more people will say, “Yep, I’ll give that company my money in exchange for a small piece of it, because I think it’s going to do well and I’ll get a good return on my investment.”
Going public is a big deal, and it happens in something called an “IPO,” or “Initial Public Offering.” It’s the company saying, “All right, world—you are now able to exchange your dollars for a small piece of me, and you should exchange your dollars for a small piece of me because I’m going to produce profits that’ll make the piece of me that you own more valuable over time.” Like NFTs, but you know, actually profitable.
The vibe of IPOs is starting to rival that of hyped-up sporting events, and when popular companies (read: tech darlings) reach the IPO stage, it’s usually pretty bananas in the news, which can drive up the IPO price thanks to #speculation.
IPOs aside, that’s why the value of a stock goes up—because that stock (or rather, your “share” of the stock) represents a small piece of a company that’s theoretically creating real value in the world and generating real income.
But just like people, companies die
Even good companies may eventually die, because the world changes, the public’s needs change, and a combination of innovation and capitalism keeps pushing us forward.
Back in 1896, this dude named Charles Dow selected a group of 12 leading stocks from American industries to create his index. You’ve probably heard of it: the Dow Jones Industrial Average.
Today, there are 30 stocks in the Dow Jones Industrial Average, or DJIA.
Do you know how many of the original 12 are still in it? None. Most of the stocks in it today didn’t even exist when he started. Things change.
But that’s the cool thing about indexes (or indices): They adapt, too. Since they’re prescribed to include only stocks that meet certain requirements (like size, or growth, etc.), the holdings in an index change as the companies do.
For example, if I created an index that was supposed to measure the 10 biggest companies in the US based on profits, as soon as the tenth company was usurped by another one, it would be replaced on my index.
You’re saying “index” a lot, Katie—is this where index funds come in?
An index fund is a collection of stocks designed to track one of these indices. The index fund allows you to invest in a certain index, like the DJIA.
The benefit of using something like an index fund is that you’re saying, “I don’t care what the top 10 biggest companies are, I just want shares of the top 10 biggest companies at any given time.” Just like above, as those companies change on the index, so too does what you own.
Compare that to deciding, for example, that you think one particular company is going to do well. You might be right, but you also might be wrong. If you invest in a company that ends up not producing the profits they say they will, you’d be disappointed in the return on the dollars you handed to the company.
You can probably connect the dots now about why index funds are so popular. They eliminate a lot of guesswork. Popularized in the 1970s by the founder of Vanguard, John Bogle, the index fund is a dope invention and John Bogle is considered a genius (here’s more on index funds).
Without getting too deep into the weeds today, it’s probably useful to mention that—in general—only about 10% of investors who try to actively beat the performance of major indexes like the S&P 500 actually do so over any 15-year period.
(The S&P 500, or “Standard & Poor’s 500,” is an index that tracks the 500 biggest companies in the United States. It’s a popular one, especially in the last decade, as it’s done very well.)
And while I’m not telling you that you shouldn’t invest in individual stocks if you want to, I am telling you that almost 90% of professionals who do it for a living (to try to outperform the total stock market) fail. Do with that information what you will.
Why does the stock market tend to go up over time?
Well, think about what a stock actually is: a small piece of a company.
It’s not just a piece of paper or numbers on a screen. A stock represents a real company producing real value and generating real income.
It’d be like if I started Money with Katie and asked you, dear reader, to invest the first $100 used to pay for the website. Let’s say we split ownership of the company, 50/50, so you owned half of Money with Katie. There are two shares of stock, valued at $50 each.
In Money with Katie’s first year of business, it made about $10,000.
You put in $50 to own 50% of Money with Katie, and it generated $10,000 in revenue, meaning you’re entitled to $5,000.
Not bad, huh?
As long as Money with Katie makes money, so do you.
But if it lost money—if it never made a dime—your $50 is worthless.
That’s why (rather than investing all $50 in Money with Katie’s stock) you’d probably be wise to spread that $50 around over, say, 50 different personal finance blogs, giving them each $1.
Of the 50, at least a couple are bound to do well, so your “shares” in the successful ones will do well.
I’m reluctant to say something as daft as, “Capitalism guarantees that the stock market goes up,” but in some ways, I think that statement bears some truth: Capitalism drives innovation. The very premise of our economic system would suggest that the stock market will go up over time, because the companies that the stock market represents are incentivized to create more value over time.
Actual, actionable advice to start investing
Some people try to day trade individual stocks to earn a profit on a sort of arbitrage—I’m not advocating for that, and I wouldn’t call that “investing.” Instead, set that shit on easy mode. Buy and hold low-cost index funds for the next 30 years.
I know it’s incredibly annoying to have someone tell you, “Okay! Cool. Now go buy some index funds,” and then walk away without another word.
People go to school and spend their entire careers figuring out which funds to invest in, so I realize that’s not super useful.
That’s why I always recommend people consider investing with a brokerage firm or roboadvisors (Wealthfront, Ellevest, M1 Finance, etc.), where your only “job” is to deposit cash, and an algorithm determines how to invest it based on your goals. It couldn’t be easier—and you get a low-cost, diversified portfolio of exchange-traded funds (ETFs) that represent the US stock market, international market, fixed income, emerging markets, and more.
This provides exposure to other categories that outperform the S&P 500 sometimes (yes, really) and it’s likely to your benefit to diversify beyond large, US companies—check out the Callan Periodic Table of Investment Returns if you’re skeptical, where you’ll see that in the last 20 years, the S&P 500 was only the top performer 15% of the time.
What’s an appropriate amount to invest?
Remember how we noted those ducks we wanted in a row prior to starting? If you’ve already eliminated all high-interest debt and your emergency fund is straight chillin’ on the sidelines, it’s wise to focus your future “saving” efforts (and excess cash flow) on investing so you can build wealth.
This episode of The Money with Katie Show prescribes a pretty simple and effective system for setting up your money management foundation to service your short-term and long-term goals, so give it a lesson if the amount is still giving you a hard time.