Investing for Beginners

Is Now a Good Time to Start Investing?

Kimberly Smith tweeted me, “Hello Mr. Allec, I was wondering about investing. If I had $1000.00 to invest for my first time what do you suggest. I believe you are one of the few to ask, going by your honesty and integrity.”

So Kimberly, I must say that I applaud you for thinking about getting started with investing, I don’t know how old you are, but I will say that the best time to start investing was 10 years ago, literally, maybe 11 years ago but the second-best time is right now.

If you’re young, this is especially important because you have time on your side, money you invest today has decades and decades to grow to potentially make you a millionaire if you just stay the course.

Also, if you’re young, you have time to recover from mistakes.

If you have decades until you need to cash in on your investments, then you can throw all your investments dollars into the stock market today.

A stock market that many would call inflated and artificially pumped up, and the stock market could crash tomorrow, but guess what? In 30 years when you need to cash out on your investments because you want to retire? You’re going to be OK.

If you’re older, you have to be a little bit more careful because you don’t necessarily have those working years ahead of you to make up for dips in the market.

An Investor’s Mindset

So a little bit about my story, I was not exposed to investing early on in life, no one around me invested, my parents did not invest. I didn’t know a whole lot about how to get started investing, so I just read books and blogs.

And after a while it hit me that all these books and blogs were basically saying the same thing.

Spend Less and Invest More

Spend less than you make and invest the difference as much as you can after you cover your necessary living expenses and have a three-to-six-month emergency fund set aside. Just stay the course, keep it simple, make this much, spend this much, invest this much, and hopefully the this much is at least 10% of how much you make.

And eventually, hopefully, you’ll get more excited about the this much than about the amount you spend. Our culture wants you to spend, spend, spend as much as you can, to be a consumer, to make other people rich.

What You Invest Makes You Rich

This, what you spend, this makes other people rich.

This, what you invest, makes you rich. So prioritize your own wealth and making yourself rich before you prioritize making other people rich.

I’m not saying you don’t pay your bills, pay your bills, but if you have the choice between spending fifty bucks on some gadget to make somebody else rich or putting fifty bucks into your investment account to make yourself rich, I would say, strongly consider doing the latter rather than the former.

This isn’t to say you can’t enjoy life, but just realize that there is a real opportunity cost to spending rather than investing. That’s the first mindset you need to adopt, the mindset of an investor, the mindset of a wealth-builder, a wealth-creator, not the mindset of a consumer.

I want you to get more excited about investing than about spending, it can happen. I honestly get more excited about putting more money into my investment accounts and making investments than I do about spending money, it’s exciting to me, it’s a thrill.

Now, I took this to the extreme in my 20s. Even though I was making good money, guess where I lived.

I shared a room with three other guys, a room, seven guys total in the house, I shared a room with three other guys to pay less than $300 a month for rent 10 minutes away from work.

This allowed me to buy my first four-unit property in my 20s, I was able to save that down payment, but I’m kind of getting ahead of myself here.

Now, of course, sharing a room with three other people who aren’t related to me wouldn’t fly now that I have a family, and I know a lot of you aren’t in a position where you can take the extreme measures that I did, but my point is that sacrifice is required, whatever that looks like for you.

How Much Should I Invest?

So right now, even before you know what to invest in, commit to a percentage of your monthly income, commit to putting that away, maybe it’s 5% right now, hopefully 10%, maybe eventually 15%, that’s up to you, whatever it is, it will require sacrifice.

But get into that habit of putting that money away, if you don’t have an emergency fund right now, put that toward an emergency fund of at least three months’ worth of living expenses, six I would say if others depend on your income and/or if your monthly income is unstable.

Build an Emergency Fund

Because what you don’t want is to just throw everything into the stock market without an emergency fund, and then the economy tanks, and you lose your job, and your car breaks down and you have to pay $1,000 to fix it, and you don’t have an emergency fund.

You could say, “Well, OK, I’ll just cash out some of my stocks.” But the market crashed, so you’re down 50%, and usually that wouldn’t be a big deal if the market crashes because you’re investing for the long-term, but if you need money today to pay to fix your car, you’re going to have to cash out at a loss which will significantly affect your future returns.

That’s why you should have an emergency fund. So commit to putting that money away now, determine the percentage, and stash it away. Once you have that emergency fund of three to six months of living expenses, and that’s everything, not just your rent or your mortgage, but everything, your food, the utilities, insurance, all of it.

Pay Off High-Interest Debt

When you have that emergency fund built, and assuming you don’t have credit card debt because credit cards could be charging you north of 20%.

If you have credit cards or high-interest debt, pay that off first because that is a guaranteed gain of 20% on an annualized basis or whatever the APR is.

I’d rather you get a guaranteed 20% or 15% paying off your credit cards or other high-interest debt than a potential 7-10% in the long run in the market.

Now, when you’ve got your emergency fund and you’ve paid off that high-interest debt, now you’re ready to invest.

The Two Best Investments You Can Possibly Make

We’ll talk about stocks in a bit, but first let me just say this: the number one investment you can make is in yourself.

It sounds cheesy, but it’s true.

Investing in Yourself

Arguably the best investor in the world is the billionaire Warren Buffett, and don’t feel bad, you can’t really compare yourself to him.

He had privileges that most people don’t, his dad was a Congressman as well as an investor himself, so if you’re not starting with that kind of family background, you can’t really compare yourself to a guy like Warren Buffett, nevertheless, he has wisdom to share with all of us.

Just because someone comes from a position of privilege doesn’t necessarily mean that they don’t have wisdom to share, and here’s some wisdom from Warren Buffett:

https://youtu.be/mD-o8t8iP1M

Buffett said that investing in yourself is the best investment you can possibly make.

And this doesn’t necessarily need to cost anything, we have YouTube and blogs and things like this, always be looking for ways to learn more to improve yourself and your knowledge and your skills.

The more you learn, the more you earn, right.

Investing in Starting Your Own Business

Number two investment, and this is optional, it’s not for everybody, but don’t discount the power of owning your own business, if you can meet other people’s needs or wants and get paid for it, that can potentially put more money in your pocket in the long run than just throwing the money into the market.

Just to give you some perspective, this YouTube channel did not make me much money before April of this past year.

But then I saw a need, people were confused about the stimulus package passed in March. So I created the best, most accurate content I could regarding the stimulus leveraging my background as a CPA, and as a result, this YouTube channel has made a good amount of money for me.

Now, you don’t have to have specialized knowledge to make money on YouTube, we have a family channel that recently got monetized that is making us a little bit of money, and we’re basically just documenting our lives, and I have no videography background whatsoever.

But this is not an entrepreneurship, I may tell my entrepreneur story at another point, but suffice it to say that starting your own business is another great investment, though obviously one that carries more risk.

Stock Market Basics

What is a stock?

A stock is a partial ownership in a company.

So if you go out today, set up a brokerage account and some even give you a bonus to sign up with them, but if you go to one of these and set up a brokerage account, and buy a share of McDonald’s stock, congratulations, you own .000, a bunch of zeroes, .0001 percent of McDonald’s.

So every time someone purchases a Big Mac, you make 0.00000000000000, a bunch of zeroes .01 cents.

Generally speaking, if the economy is doing well, and McDonald’s is doing well, and they’re beating Wall Street analysts’ predictions of their earnings and all that, your share of McDonald’s stock will probably go up in value.

But if the economy isn’t doing well, if the market as a whole is freaked out about recession, war, or virus, and/or McDonald’s itself isn’t doing well on a micro level, then the share of McDonald’s will probably go down in value.

That’s really simplifying it, but it’s a general picture.

You Don’t Have to Pick Stocks

Now, stock picking can be very tricky and stressful because there are literally thousands of stocks for you to choose from to invest in, thousands of companies, and how the heck do you know what the economy is going to look like later this year or next year or five years from now?

And how the heck do you know about, not just the economy as a whole, but if a given company is going to do well later this year or next year or five years from now?

There are signs, but it’s impossible to say for sure, no one knows the future.

But here’s the good news: you don’t have to pick stocks, you don’t have to worry about if this stock is the best investment or that stock is the best investment for you.

Investing in Index Funds

You can invest in a bunch of stocks at once by buying something called an index fund.

So just like you can buy McDonald’s stock, you can also buy the Vanguard Consumer Discretionary Index Fund.

And if you buy into this index fund, which is a mutual fund, you can invest in 296 different consumer discretionary stocks, what does consumer discretionary mean, that just means non-essential goods and services, right, you need groceries, you need toothpaste — so groceries are toothpaste are known as consumer staples — but you don’t need fast food, restaurant food, you don’t need McDonald’s — that’s consumer discretionary.

So you can see that this Vanguard Consumer Discretionary Index Fund has 296 stocks, and you can look at its top 10 holdings, and you will see that McDonald’s is the #3 holding in this fund, along with other major consumer discretionary brands like Amazon, Home Depot, Nike, etc.

So by purchasing this index fund, this Vanguard Consumer Discretionary Index Fund, you are essentially investing in all of these different companies at once.

Some will go up, some will go down, sometimes all of them go up, sometimes all of them go down, but in the long run, in the aggregate, even if some of these companies go bust, in the long run, this pool of 296 stocks, and the population of stocks may change over the years.

But my point is that in the aggregate, this Vanguard Consumer Discretionary Index Fund should go up in the long run.

And you are diversifying among 296 companies rather than putting all your eggs in one basket.

Now, what’s a problem with this Vanguard Consumer Discretionary Index Fund? You need a minimum of $100,000 to invest in this mutual fund.

Investing in ETFs

But don’t be sad because there are things called ETFs or exchange-traded funds, and these ETFs track the same thing as these mutual funds, but at a much lower entry point.

So if you scroll up on this Vanguard Consumer Discretionary Index Fund page, it says, “Also available as an ETF (starting at the price of one share).”

So how much is one share of this ETF? It’s about $200 right now, and you can see it tracks the same things, 296 stocks.

So you can buy these ETFs in your brokerage account, if you have Webull, and you can get free stock with Webull.

Listen to Warren Buffet

You can buy these index fund ETFs just like any other stock, and here’s what Warren Buffett has to say about index funds:

Warren Buffett: Buying and Holding Index Funds has Worked

You’re not hearing it from me, folks. You’re hearing it from one of the top 5 richest people in the world and arguably the greatest investor in the world. Buffett didn’t come up with something revolutionary like Amazon or Microsoft, he made his billions simply by investing, so that’s why he’s called arguably the greatest investor in the world.

And he said it, index funds.

A Solid $1,000 Investment

Now, there are also index funds that don’t track one particular industry, they track the market as a whole, or maybe 500 large publicly-traded U.S. companies like the S&P 500.

So, if you really just want to invest in something, just to get your feet wet, I would say start with an index ETF like VTI, this is a Vanguard ETF that basically tracks the entire U.S. market, tracks 3,493 stocks.

If Kimberly, if you said “oh I have $100,000 to invest”, I might be a bit more particular about exactly what to put money into, and even that would be difficult because I don’t know your background, your income, your age, your risk tolerance.

But since we’re just talking about $1,000 here, I just want you to build a habit, the habit of investing.

VTI would be a great long-term pick, it’s basically just betting on the United States in the long run.

The stock market could very well crash tomorrow and take VTI or any other stock or fund down with it, so if that happens, don’t come back here and comment, “Well, you said it was a good investment, but the market crashed,” look, I’m saying it’s a good investment in the long term, remember, you’re investing for decades, not for weeks or months.

If you want fast money, start a business, don’t play the stock market to make fast money.

And if the stock market goes down, view that as an opportunity to buy stocks on the cheap. This last COVID-19 downturn, I dollar cost averaged in almost every day, almost every day I bought stocks.

But don’t let the crashes in the market depress you, view them as a fire sale to buy stocks cheap.