Go Shopping For Investments

Let's Get Down To Business

Now that you've decided how much you're going to invest each month and what type of account you're going to use, it's time to actually start investing! You just need to learn a few principles and then you'll be ready to take action and buy your first investment. Let's do it!

Principle 1: Fees Are Public Enemy Number One

Your investment company is going to charge you some fees for maintaining your account. Back in the day they were really good at slipping in fees everywhere – including when you bought and sold your investments. This is how financial institutions get rich and rip people off. This used to be largely unavoidable. High fees were just the price of admission for investing.

Fortunately those days are mostly behind us. Now there are lots of options with much lower fees. In fact, most fees (like the fees for buying and selling) can be completely avoided. The one fee that's still around is usually known as the expense ratio. This is the percent of your total investment the investment company is going to take each year in return for managing the account.

Rock bottom expense ratios are around 0.04% or even lower. However, there are still lots of investment companies that charge expense ratios of 1% or more for investments. That may not sound like a huge difference, but it makes a huge difference – especially over the long run. Spend some time with the calculator below to see how much of a difference those fees can make.

Hopefully you can see that high fees can cost you tens or even hundreds of thousands of dollars. Always check the fees when reviewing investments! As a rule of thumb, shoot to keep each of your expense ratios under 0.2%.

Principle 2: Stability vs. Growth

The two primary classes of investments available in your accounts will be stocks and bonds. You've probably heard of both of those and know that these topics are endlessly discussed and debated. We're going to keep it simple.

The thing we need to focus on is that there are tradeoffs between stocks and bonds (as with most things in life). The tradeoffs are between growth and stability.

Stocks are a wild ride

Stocks grow at a pretty incredible rate in the long run, but it's a roller coaster. They can be up and down and all over the place: up big one year, tanking the next year. But over the long haul, nothing beats their growth. High growth but low stability.

This is totally fine for a young person or someone who's a long way off from Assets & Chill. If it's going to be a long time before you start pulling your money out of your investments, you don't care if your investment is up or down in any given year – you just want as much growth over the long run as possible.

Bonds are basic and boring (which can be a good thing)

Bonds are slow and steady. They don't grow much, but they also rarely tank, unlike stocks. They just steadily and reliably perform. High stability but low growth.

This is perfect for someone who is nearing or already in Assets & Chill. If you're at a point in your life (or getting close to it) you don't want growth anymore – you want stability. You want a stable investment so you can consistently withdraw from it year in and year out without having to worry about dramatic swings.

The moral of the story

We can balance growth and stability for where you are in your investing journey by adjusting the proportion of stocks and bonds in your portfolio.

• When you're younger or have more time until you're going to start taking money out of your portfolio, you should have more stocks and fewer bonds because you want more growth and don't need the stability (yet).
• When you're older or have less time until you're going to start taking money out of your portfolio, you should have fewer stocks and more bonds because you want more stability and can't handle the volatility of growth anymore.

Principle 3: Buy The Whole Haystack

Lots of people are intimidated by investing because they don't know which stocks and bonds to invest in. There are thousands out of them out there – how are you supposed to pick?!

Well, it's a bit of a trick question because picking individual stocks and bonds is a terrible idea. No one can predict the future and you're going to be in bad shape if one of those stocks or bonds goes to zero.

Fortunately, there's a simple solution to this problem: buy all of them. This is part of the revolution in investing that has occurred over the last few decades. It used to be that you had to pay an investment manager high fees to pick stocks and bonds for you to invest in. It was a doubly bad deal because no one is good at picking individual investments and you had to pay those high fees (which we talked about earlier).

You don't have to do that anymore. You can just buy all the stocks or bonds in one big basket. You can literally buy a basket of every single stock (or bond or both) in the United States or even in the entire world. This is called index investing or passive investing.

You can think of this approach as buying the whole haystack instead of searching for the needle in the haystack.

It has a lot of benefits.

• You don't have to pay those high expense ratios anymore because there's no high paid investment manager that has to be compensated.
• You're automatically diversified, which means lower risk. If a few of the stocks or bonds go to zero, it's not a big deal because there are thousands of other investments in the basket making up the difference.
• You're automatically buying the stock of the next hot company. If they're a publicly traded company, you automatically own their stock.
• You don't have to do anything or make any decisions about what to invest in. You just keep buying more and more of the basket of everything.

Time To Buy

Enough with theory; it's time to take action.

Our project is to buy investments that satisfy our three principles:

• Extremely low expense ratios (0.2% at the highest)
• The right balance of stocks and bonds for where you are in your investment journey
• A passive index fund

Fortunately, due to the revolution in investing that I've mentioned, this should be pretty easy to do in your investment account. Your job is to log in and find those options. They'll usually have names like "Total Stock Market Fund" or "Total Bond Fund."

Does buying both stocks and bonds and ramping them up and down over time sound too complicated? There's actually an even easier solution. It's called a target date fund. It's a single investment that slowly adjusts the bonds and stocks inf your portfolio as you get closer to the year you'll start withdrawing money from your investments. Pretty nifty!

All you have to do is choose the year you think you'll start withdrawing from your investments (it's fine to estimate) and then choose the target date fund closest to that date (they usually have names like Target Retirement 2050 Fund).

One thing to be careful about: expense ratios can vary widely for target date funds. Be sure to make sure the expense ratio is below 0.20%!

Wrap this project up by buying your first investment!

Up Next

Now that you're officially an investor, we're going to put investing on autopilot in the next project. That way you'll wake up someday in the future and realize you've reached Assets & Chill.