# Personal Investing 101: Advice for Newbies



## garsh (Apr 4, 2016)

I didn't really know much about investing growing up. I mean, I knew it would be a good idea to invest some money in order to save for retirement, but I didn't know too much more than that. I invested in my company's 401k, and I put money into an IRA every year too, but I wanted to invest even more. Smith Barney gave a little presentation at work, and I signed up with them to help me with my investments (I realized only later that this was a big mistake - it wasn't fee-based - they took a commission on my investments - bad move). This was in 1999. The big stock market crash would start in 2000 and last through 2002. My investments performed horribly, but I assumed that was due to the stock market crash. It turns out that this was only part of the reason. They continued to perform poorly even after the market started recovering.

Sometime around 2007, a coworker lent me a book: The Lazy Person's Guide to Investing. It was an eye-opener. There are several third-party sellers on Amazon selling used paperback versions for about $6 shipped. The Kindle edition is $10. I recommend getting it and reading at least the first 30 pages. The first 30 pages pretty much tell you everything you need to know - that a simple portfolio is best. The next 100 pages are just stories and scenarios providing more evidence that these simple portfolios are the best. The rest of the book goes into various special scenarios you may have, and how best to follow their advice in those situations. *TLDR: get a Vanguard account, because Vanguard has the lowest fees. Put most of your money into Vanguard's Total Stock Market Index fund, and the rest into their Total Bond Market Index fund.*

After reading that book, I fired my "financial advisor" at Smith Barney and moved all my assets over to Vanguard. I've been in much better financial shape ever since.

One of the "simple portfolios" presented is based on item #8 in this short list of personal finance TODOs written by Scott Adams. This is definitely all good advice. Be sure to follow all of this advice - in order - before thinking about investing.


----------



## bwilson4web (Mar 4, 2019)

If available, sign up for an employee stock purchase plan. It is often the cheapest way to buy the stock. Then sell that stock when you leave the company.

Bob Wilson


----------



## garsh (Apr 4, 2016)

*Chapter 2: Fees Suck*

_TLDR: Pick funds based on fees. Vanguard has lowest fees. You can't predict future prices, but you CAN predict costs due to fees._

Here's the thing that I didn't understand back when I was investing through Smith Barney. All of these various investment funds have fees associated with them. Some of them have multiple fees. And these fees will absolutely eat into the profits - robbing you of those profits.

Load: This is a fee paid up-front to the broker in order to invest in the fund.
Expense Ratio: This is an annual fee paid to the fund managers.
12b-1 Fee: This is an annual fee paid to the broker.
All of these fees eat into your investments more than you might expect.
Let's take a look at some different funds and compare them.

*VTSMX - Vanguard Total Stock Market* (Load: 0%, Expense Ratio: 0.19%, 12b-1 Fee: 0.02%)
This tracks all stocks in general. Vanguard funds have some of the lowest fees available.

*SHRAX - ClearBridge Aggressive Growth Fund* (Load: 5.75%, Expense Ratio: 1.13%, 12b-1 Fee: 0.25%) 
This was one of my Smith Barney investments. As you can see, this fund has a lot of fees. My broker made a lot of money off of me with this investment.

*VBMFX - Vanguard Total Bond Market* (Load: 0%, Expense Ratio: 0.20%, 12b-1 Fee: 0.03%)
Bond investments are usually viewed as fairly conservative. You don't generally make a lot of money on them, but they also tend to increase during down markets.

Let's compare investing $1000 in each of these investments for 3 years, from January 2002 to December 2004 (covers end of the crash & beginning of the recovery)

*VTSMX: $25.42 to $28.77 (ave 4.4% annual increase)*

$1000 invested.
Each year gained 4.4%, but subtract 0.21% fees = 4.2% gain per year
Final value: $1131.37
Not bad at all! An investor would have gained 12.6% over those three years.

*SHRAX: $86.83 to $95.17 (ave 3.2% annual increase)*

$1000 invested.
Subtract 5.75% load = $57.50, so actually, only $942.50 invested.
Each year gained 3.2%, but subtract 1.38% fees = 1.82% gain per year
Final value: $994.90
So look at that. The fund itself did ok. The investor's broker made $57. The fund managers made $4. But the investor actually LOST $5 because of all of the fees.

*VBMFX: $10.17 to $10.27 (ave 0.33% annual increase)*

$1000 invested.
Each year gained 0.33%, but subtract 0.23% fees = 0.1% gain per year
Final value: $1003.00
So here we have a rather poor-performing investment, right? It barely gained anything at all! But because of the very low fees, the investor still comes out ahead.


----------



## garsh (Apr 4, 2016)

bwilson4web said:


> If available, sign up for an employee stock purchase plan. It is often the cheapest way to buy the stock. Then sell that stock when you leave the company.


Signing up for an ESPP makes sense because it allows you to purchase stock in your company at a discount. But you should NOT hold it. Buy it, then sell it _immediately_.

You do not want your investments tied to the company you work for. Consider the worst case scenario where the company goes out of the business, you lose your job, and the stock becomes worthless. You want to diversify your investments to protect against scenarios like this.


----------



## gary in NY (Dec 2, 2018)

Vanguard is an excellent low fee option for independent investors. Luckily for me I had access to a very good deferred compensation plan at work, and I took full advantage of it from the day it was first offered. It also included several Vanguard funds. 32 years later, it has exceeded my expectations. I only wish I could have started earlier. Time is your friend in retirement investing, although it's never too late to start. (I studied finance in college and was in finance my whole civil service career, so much of this was known to me - I had some very good and forward thinking professors along the way - which definitely helped. Some 24 years ago a group of my coworkers and I formed an investment club in order to learn more about investing, and hopefully build a successful long term portfolio. We are still going strong.)

I am reminded by garsh's list above in post #1 that I do not have a will, so I need to get on that point. It took many years to meet most of the other objectives. In time, your diligence will reward you - it paid for my Model 3.


----------



## lance.bailey (Apr 1, 2019)

lots of good stuff here @garsh thanks.

rules across borders are very different, for example in Canada we have RRSPs (registered retirement plan) and different rules around Capital gains.

RRSP limits are set based on the previous years income and pretty much across the board is the recommendation to put as much as you can into RRSPs to maximize if possible and avoid tax on those contributions. After retirement you get to pull out from the RRSPs when you are at a lower tax rate.

ESPP in Canada are interestingly different as well. The discount on purchase price can be a taxable benefit on your T4 end of year income statement. however if you do a same day trade were you sell the stock as soon as you get it, you can avoid the capital gains tax.

Now I am no investment genius or proffessional so value this advice the same as what you paid for it (nothing), but it does point out that good advice is valuable, like @garsh got from the Scott Adam's info.


----------



## Feathermerchant (Sep 17, 2018)

Worked for 35 yrs and retired now for 5+
Funds with loads are OK. Just look at annual returns. They include expenses. (Check me out on this) I just care about total return. 
I usually look out to 10 years or more for maximum returns. I do not own any individual stocks but I do own index funds.
You can go hear and search:
https://fundresearch.fidelity.com/fund-screener/
Then you can sort by return %. I chose 10 yr return here:
https://fundresearch.fidelity.com/f...ssetClass=&category=&ntf=Y&order=fundType,ntf
Many with >20% annual return.
Choose what suits you and choose several to spread your $ out and I try to limit the number of funds/investments I am in to around 10 so I can keep track of them.
I'm not pushing Fidelity it's just what I know.


----------



## gary in NY (Dec 2, 2018)

garsh said:


> Signing up for an ESPP makes sense because it allows you to purchase stock in your company at a discount. But you should NOT hold it. Buy it, then sell it _immediately_.
> 
> You do not want your investments tied to the company you work for. Consider the worst case scenario where the company goes out of the business, you lose your job, and the stock becomes worthless. You want to diversify your investments to protect against scenarios like this.


When I was in school, there were two lines of thought about this: employees that have an financial interest in the company tend to work harder/are more productive and want to see the company succeed. The other was the risk of the employee losing his/her investment as you describe. But, back then the corporate culture was different. My father, for example, had lifetime employment w/pension benefits with a Fortune 500 company, and participated in the ESPP for nearly his entire career. After his death, my mother was able to keep/maintain the house by using the capital he accumulated and his survivor pension benefits. He had no other investments. Sounds very risky today, but was pretty much the norm back in the '60-'80s.

I don't think it is strictly tabu to own your company's stock today, but you don't want that to be more than a certain percentage of your portfolio. That percentage will vary based upon your risk/reward tolerance. But you have to be diversified. The economic cycles can devastate your portfolio otherwise. Not for the faint of heart. Index funds, or even date targeted funds, can buffer that, to an extent.

Ah, it's a wonderful world out there.


----------



## Feathermerchant (Sep 17, 2018)

Having your employees only able to buy your company's stock also gives a you a captive market. 
An acquaintance that worked for a small utility in WA. had about $500K in company stock. He was near retirement when Enron bought the utility and converted the stock to Enron stock then it became worthless when Enron went bankrupt. I felt really sorry for him. He literally lost everything. 
But the result of that and Worldcom was that now employers must provide investment options, allow you to sell their stock, etc.
Our first choices were not real good or easy to figure out, trades took weeks, and sometimes we were locked out of our accounts for 2 weeks for 'upgrades' while executives were not. That was changed too thank goodness.

Another piece of advice - If you can have an HSA, get one and put the max per year you can into it. After 65 you will no longer be able to contribute.
If your spouse is on your insurance then she can also have an HSA and your combined annual contributions are more than yours alone. And they can continue to contribute until THEY are 65. The HSA can be invested in anything you want and you don't pay taxes on it when withdrawing for medical expenses like prescriptions or other out-of-pocket. Ours are with Fidelity and we use debit cards to pay. Super easy.
See the IRS or your investment advisor for details.


----------



## slacker775 (May 30, 2018)

I have an ESOP plan at work and I’m certainly contributing to that. I was first able to get in for Q2 which was tremendously advantageous after the stock price plummeted in March with everything else and it had largely rebounded in full by June so the 10% price discount was effectively around 50%. My holdings there are currently immaterial as part of my portfolio so I’m not worried about selling any time soon. I have to hold it for a minimum of 12 months anyway.

But the points about fund fees and costs is extremely important and doesn’t often get the attention it deserves. I’ve seen 401k plans default to terrible funds that are designed to maximize fees for the investment house and people are none the wiser. Apparently, the company can often dictate what the default fund(s) would be, but often these things are run by HR and they have no clue so they just do whatever the program tells them to do and all of the employees that don’t do their own research get to suffer.

If only we’d spend just a few hours talking about real world investing and basic personal finance in schools instead of reading more Shakespeare....


----------



## garsh (Apr 4, 2016)

slacker775 said:


> If only we'd spend just a few hours talking about real world investing and basic personal finance in schools instead of reading more Shakespeare....


Hear hear!
There's no good reason why I was unaware of such basic advice until my 30's.


----------



## GDN (Oct 30, 2017)

My word to add here is start young, especially in any 401K plan or a plan where your employer matches money. That employer matching money is FREE, put in enough to not leave any of it on the table. I too wish there had just been a few lectures on some basics of investing, and who knows maybe there was and I just didn't listen. I didn't participate in my companies 401K or stock purchase plan the first 4 years of my career, and it likely pushed my retirement by 5 years.

This is one of my favorite graphs for young people.


----------



## Feathermerchant (Sep 17, 2018)

I started work out of college. My colleagues and I were interested in investing and talked to our seniors and me my dad. I invested in ESOP, thrift plan and 401K at near the max. I was able to retire at 57 and now I have more money than when I retired. It helps that I also have a pension and my company pays about half my monthly healthcare.

Again with the expenses - If they are included in the annual return then you don't care. You can just choose the investment with the highest return. Last time I checked mutual fund reported returns have to include all expenses so expenses are of NO concern. Prove me wrong.


----------



## garsh (Apr 4, 2016)

Feathermerchant said:


> You can just choose the investment with the highest return.


This right here is the impossible task. Sure, you could limit your investments to fixed-rate securities like bonds (0.1%) and CDs (0.85%, woohoo!), but those aren't historically as good as stocks and mutual funds. And for stocks and mutual funds: Past performance is no guarantee of future results

The only thing that you can control are fees. And as I demonstrated in the "Fees Suck" post above, a poor-performing mutual fund with low fees can still make money, while a decent-performing fund with high fees will still lose money for you. If you make sure the fees are low, then it doesn't even matter if the fund has the "highest return". You come out ahead anyhow.


----------



## gary in NY (Dec 2, 2018)

GDN said:


> My word to add here is start young, especially in any 401K plan or a plan where your employer matches money. That employer matching money is FREE, put in enough to not leave any of it on the table. I too wish there had just been a few lectures on some basics of investing, and who knows maybe there was and I just didn't listen. I didn't participate in my companies 401K or stock purchase plan the first 4 years of my career, and it likely pushed my retirement by 5 years.
> 
> This is one of my favorite graphs for young people.
> 
> View attachment 35869


That is a great chart which really shows the time advantage of investing. I used to put similar info in our newsletters at work. I tried to follow this advice when I started working, but it was difficult. Payroll deduction made it easier, once we set it up. We had pretty good participation by our employees. But it was hard to get the young new hires to think about retirement at the time it would be most advantageous for them to do so. They didn't necessarily think they would stay with the job long enough to make it worthwhile, even though the savings are transferable to a new employer's plan, if they wanted to do so.


----------



## gary in NY (Dec 2, 2018)

slacker775 said:


> If only we'd spend just a few hours talking about real world investing and basic personal finance in schools instead of reading more Shakespeare....


I don't disagree, but I also do like Shakespeare  (more so now then in high school days)


----------



## WhiteDust (Oct 1, 2018)

garsh said:


> Sometime around 2007, a coworker lent me a book: The Lazy Person's Guide to Investing. It was an eye-opener. There are several third-party sellers on Amazon selling used paperback versions for about $6 shipped. The Kindle edition is $10. I recommend getting it and reading at least the first 30 pages. The first 30 pages pretty much tell you everything you need to know - that a simple portfolio is best. The next 100 pages are just stories and scenarios providing more evidence that these simple portfolios are the best. The rest of the book goes into various special scenarios you may have, and how best to follow their advice in those situations. *TLDR: get a Vanguard account, because Vanguard has the lowest fees. Put most of your money into Vanguard's Total Stock Market Index fund, and the rest into their Total Bond Market Index fund.*
> 
> After reading that book, I fired my "financial advisor" at Smith Barney and moved all my assets over to Vanguard. I've been in much better financial shape ever since.


This is really great advice and a great recommendation for a book to read. I also recommend The Simple Path To Wealth. It will take more than 30 pages of reading to get the gist, but I got this one on Audible for long-ish road trips since my drive to work is relatively short.

I think the best thing we can do is teach what we've learned to our family members, children, nieces, nephews and anyone around us that's younger than we are and help them get started. The sooner we get them started, the longer they can benefit from the growth.


----------



## garsh (Apr 4, 2016)

I was considering putting some money into ARK Invest's ARK Innovation ETF (ARKK) since they've been a very bullish, consistent supporter of Tesla.
But looking at their prospectus, they have an expense ratio of 0.75%! Yikes, that's pretty high.

I'll just stick to Vanguard's no-fee stock transactions and buy TSLA directly.


----------



## JWardell (May 9, 2016)

garsh said:


> I was considering putting some money into ARK Invest's ARK Innovation ETF (ARKK) since they've been a very bullish, consistent supporter of Tesla.
> But looking at their prospectus, they have an expense ratio of 0.75%! Yikes, that's pretty high.
> 
> I'll just stick to Vanguard's no-fee stock transactions and buy TSLA directly.


I've been happy with ARKK, I like that they invest in truly innovative companies, and they do better than most of my growth funds as well. Still less than 1% ER isn't bad, especially when performance is in the 30-40% range.


----------



## Feathermerchant (Sep 17, 2018)

FWIW I don't own any individual stocks or bonds. I own mutual funds instead. Some are index funds like NASDAQ or SP500. I own two Teslas I figure that's enough risk regarding one company. But then I'm fairly conservative.


----------

