What is investing?! Why do I care?
It starts like this:
It starts just like this. (Of course.)
Someone has a cool idea and decides to form a company. People like what that company sells. Over time, that company becomes profitable and starts making more and more money. Other people see that this company is doing well and want in - they want to invest in it.
I’ll now walk you through what and how these people invest in companies like the one above and how you can (or probably already are!) one of them too.
Essentially, there are two things you can do: 1) you can buy ownership in the company (aka a share of stock!), or 2) lend money to one (aka a bond!). There are other types of investments too, but don’t worry about them yet.
Ok, two options. Got it. But which companies?
You don’t necessarily want to buy just one company’s stock. That’s really risky because you are then tying your financial future to the whims of just one company’s leadership, products, etc. Instead, you want to buy ‘baskets’ of stocks and bonds - basically a whole group of different companies that can diversify your risk among multiple companies. The theory here is that even if one company is not doing as well in a given moment, other companies could be doing better to offset that one company.
Baskets to the rescue!
Conveniently, companies like Fidelity and Vanguard assemble these ‘baskets’ for you that you can buy all at once or in different combinations. These ‘baskets’ are great because you can buy stock and bonds from many, many different companies which provides you the diversification we discussed above. There are many different types of baskets, both in basket style and contents. Different basket “styles” include mutual funds, ETFs, index funds, target retirement funds, etc. (I’m sure you’ve heard those terms somewhere before!) Each basket can hold US stocks, international stocks, US bonds, international bonds, stocks of small companies or of large companies, the stock of Coca Cola or of Alaska Airlines, and so on and so forth. There can even be baskets of baskets! It’s pretty endless.
This is where I should probably tell you - If you have a 401(k), 403(b) or some other retirement plan provided by your employer you are probably already invested in the market!
How are you feeling at this point?
These accounts are just containers waiting to hold your selected investment - don’t just leave your money sitting in cash in this account. :o But wait, that’s not all! Don’t get overwhelmed yet. Because there’s one particular type of “basket of baskets” that’s here to help.
They are called target retirement funds. These funds automatically adjust the baskets within to automatically adjust as you get closer to your target retirement date. For example, the balance of stocks and bonds in a “target retirement 2030 fund” would look different from a “target retirement 2060 fund”. You just have to select the fund that’s closest to your own target retirement date, and then you don’t have to think about it again.
Note the cost and make the tradeoffs.
One word of caution though - sometimes these funds can be expensive. Each “basket” or “basket of baskets” is a product created by a company, and products cost money. The price of you pay to invest in these baskets is called the “expense ratio”. The “expense ratio” is a measure of what fraction of your money is going to the company that created it compared to how much money you have invested in the fund. Each fund has its own expense ratio. Also note that with a target retirement fund (or any other “basket of baskets”), you will be paying both the expense ratio of the target retirement fund basket wrapper and the expense ratio of the funds underneath. This is ok! It’s just part of the tradeoff of “setting and forgetting it”. Theoretically the expense ratios are reasonable (less than ~0.5% as a general guideline).
So now, it’s all you. If you have a 401(k), IRA, or other brokerage account, do some digging. Find out 1) what your money is invested in, 2) how much it costs, and 3) what your investment options are for the money in that account.
Bam. You can do it! Knowledge is power.
Need help with what comes next? Schedule a free 15-minute intro call for one-on-one guidance to ensure you’re on the right financial track to build financial momentum and work to achieve your life goals, one step at a time.
Sign up for blog updates to stay on top of the latest Momentum blog posts!