I feel like an imposter writing this because I am not a CFP, CPA, or have any certifications in finance. Even though I am not a professional, I love to read about personal finance. I am interested in investing and the markets at a high level. Friends and family know this, so I had a few of them come to me because they are nervous about how the markets are performing right now because of the reaction to COVID-19. I wanted to outline my perspective on this in a way that (I hope) isn’t overwhelming or intimidating. It is basic information that I think all people should know and maybe this downturn is the wake-up call you need to start that learning process.

Annual stock market performance as of March 27, 2020
At a high level…

Investing your money is important to build long-term wealth, which is something we all want to do if you want to “retire” one day. It is your money. It is your responsibility to understand these things. Spend time researching these things and constantly learning so you understand and can take control of your future!

Do not invest your money if you…

This is because you want to use investments for the long-term. If you may take this money out of the market, that isn’t smart. Therefore, you should only invest money you don’t need to live day-to-day.

Types of Investment accounts

Assuming you are in control and planning for your future, you have a few options on where to invest. This is what I think people find confusing.

  1. Tax-advantaged (meaning you get a tax benefit in one way or another)
  2. Taxable (you will invest with your take-home money, so you already paid tax on it and will pay taxes on any gains you make. There are no tax benefits on these accounts.)

Let’s go a little deeper into these pots so you know what vehicles these include:

Tax-Advantaged: at a high level, these are mostly retirement plans. The government is giving you a tax advantage because they want you to plan for your long-term so they don’t have to. They are encouraging you by giving you a tax break. You may recognize some of these types of accounts (think of these as different pots):

  • 401k: different types, but company sponsored)
  • Traditional IRA: reduces your taxable income now, pay taxes when you take it out
  • ROTH IRA: invest after-tax money so you don’t pay taxes on its growth
  • SEP: for individual entrepreneurs
  • Simple IRA: 401k for small businesses
  • 403b: like a 401k for non-profit and government employees
  • 457: deferred comp plan for entities listed above
  • Healthcare Savings Account (HSA): available to individuals with high-deductable healthcare plans to help them plan for their future healthcare needs

Taxable: these accounts are a regular brokerage account where you can buy and sell securities. If someone says they have mutual funds with Charles Schwab or that they just bought some Apple stock with their broker, then the likelihood they did that in a taxable brokerage account is high, but you can still do those things in your retirement pots.

What do you Invest in?

So you have your pots (and likely have many different ones), but what do you put in them? Regardless of whether or not there is a tax break, you can buy or sell different types of securities. (This is very basic, and I think what everyone needs to understand. Like all financial products, you can make this much more complicated.)

There are two groups of securities:

  • Equities: This is when you are buying ownership or equity in a company. Think about your house, you have the value of your house – the mortgage (liability). The remaining amount is your equity or ownership. Publicly traded companies allow individuals and institutions to buy a share of their equity to give them more capital to grow over time.
  • Fixed Income: This is a note or a loan that will pay out a fixed amount of interest/income over time. You may have government savings bonds – this is a type of fixed income. Your mortgage note is an example of this on a bank’s balance sheet, whereas it is a liability on your personal balance sheet.
How do I purchase securities for investing

There are a lot of ways that you can purchase securities, and it all depends on your risk profile, timeline to invest, and understanding of investing. For the purposes of this article, I want people to understand that you can buy any of the below items and put them in any of your pots. There are pros and cons of each, but this is where you need to learn, research, and feel comfortable with where your money is going. You can put any of these into any of the pots listed above.

  • Mutual Funds: These are a group of stocks (and/or bonds) that a firm will put together to meet various goals. You may have a group of stocks from all non-US companies which could be labeled as an “international fund.” Another one may be built with long-standing, stable companies (think Coke or Johnson & Johnson) for a “large-cap” or “growth and income” type fund. Another one may be made entirely of tech stocks that will fluctuate a lot since it’s a less stable industry, but it will likely see a lot of growth.
  • ETF: This stands for Exchange-Traded Fund. These have lower fees than mutual funds and can be made up of different types of investments. This review will give you a lot more information!
  • Index Funds: This means there will be lower fees since the stocks in this fund are built to mirror a certain exchange or index (like the S&P 500, a total stock market, FTSE100, etc.) There isn’t a lot of thought that goes into these because they are going to deliver what the market brings. That means, their returns will be what that specific market returns.
  • Individual stocks or bonds: You can also go to your brokerage service and buy individual options instead of the pre-packaged, already diversified options that are listed above. The general consensus is this is not the way to go for long-term investing as an index fund will outperform most individual stock-pickers’ success rates. Even Warren Buffett agrees.
What I do

I would never suggest someone copy me and my investment strategy because everyone has different goals and different levels of risk. That being said, I really enjoy hearing about how people invest and manage their money to see if there is anything I could do to improve my portfolio.

Currently, I house almost all of my pots at Fidelity because of their low fees and no commissions. People will also recommend brokers like Vanguard, Charles Schwab, and others. I use Fidelity likely because my first job ran our 401k through Fidelity so I know the site. As of March 2020, I have a rollover traditional IRA, a ROTH IRA, a trading account, and an HSA. I also have a trading account at E-Trade because that is what I used when I first started buying stocks during the 2008 crash.

My accounts
  • Rollover traditional IRA: This is made up of all of my 401k contributions from my first job. I rolled it to an IRA because I didn’t need it in the 401k anymore. New money cannot be added to this account, so its outstanding balance is what it is. I just watch it go up and down. Since this is for the long-term, I invest in a total stock market index fund. Dividends get added in as the fund earns them, but I cannot touch the money.
  • ROTH IRA: I have been building this up over several years and was able to roll over my ROTH contributions from my first company into this fund. Since I paid taxes on it already, the government doesn’t need to track it separately. Since I follow the Dave Ramsey baby steps, I put 15% of my income into retirement. This is the first place I put my money. You can contribute up to $6,000/person each year unless you are older. I invest in the same total market index fund as my rollover IRA (FSKAX).
  • Trading Account: This is where I put any extra retirement funds and also have fun investing in stocks. I don’t invest a lot of individual stocks, but when the markets go south like they are now, I have a lot of fun buying poorly performing companies that I understand (currently airlines, cruise lines, a share of Disney, and such) that I believe will come back when the world recovers. This is not part of my wealth strategy, just something I do because I love doing it. It is an insanely small part of my net worth, but I love to watch how they perform. Any long-term funds are put into a total stock market index fund. Since this is a taxable account, I can pull the money out at any time. I may do this at some point to buy rental real estate.
  • Healthcare Savings Account: I decided this year that I should invest my HSA for the long-term, but I don’t think this is something everyone should do. I have been lucky because I have been generally healthy and have an emergency fund saved. Last year, I was able to have an HSA for the first time in a while, so I want to make the most of it. I plan to use this for the long-term, so I’m investing in a total stock market index fund for this. Once I get to age 65, I can pull this money out for anything without a penalty. Until that time, I can only use it for healthcare-related expenses. Later in life, maybe I will change this strategy, but for now, I’ve decided to use this as a retirement-like account.

Next Steps

  1. Track your net worth with a tool like Personal Capital
  2. Create goals. What do you want to accomplish in your future? How much money will you need to make that happen? You may not know the specific amount, but if you have goals, then saving for the long-term will be easier.
  3. Know what pots are available to you. Do you have a 401k at work? Have you been contributing? Do you have accounts from a former job? Try to collect everything.
  4. Read and learn. After you know where you are, learn more! This is just an intro. That new knowledge will help you go in the right direction.
Helpful Resources
  • Dave Ramsey (love the podcast and listen to it daily)
  • ChooseFI (I love their podcast. It’s definitely worth it to listen to catch up on old episodes)
  • BiggerPockets Money Podcast (Same as ChooseFI – listen to the old episodes, and then keep up with the new interview weekly!)
  • There is a whole slew of books I love, but I’ll list those in a future post!