A Beginner’s Guide to Investing (and Busting the Myths That Are Stopping You)

For many people the thought of investing can seem overwhelming, confusing, and scary — especially if you grew up in the midst of the 2008 financial crisis.

And, investing can seem out of reach. You may think you need a lot of money to get started or that you need to hire a financial advisor to manage your investments for you. You may think investing is like gambling.

However, all of these are myths. Let’s break down all of the ways they’re wrong.

Myth #1: Investing is confusing and you need a financial advisor to help you.

Let’s start with the idea that investing is confusing. There are a lot of terms when it comes to investing, and you may not know exactly (or at all) what they mean — expense ratios, dividends, ETFs, mutual funds, stocks, bonds, capital gains, etc.

While it doesn’t take long to start to understand what each of these terms mean (we’ll get to a few of them in this article), you don’t need to understand all of the details to get started.

In fact, a successful investment strategy boils down to two very simple rules.

1. Buy low-cost passive index funds regularly.

2. Hold onto them for a long long time.

This is the conclusion that John Bogle, the founder of Vanguard, came to in his book The Little Book of Common Sense Investing, and it’s also the advice Warren Buffet recommends, as well as most folks in the FIRE community.

Low-cost passive index funds are low-cost because they are passively managed. They are passively managed because they are a mutual fund that simply mirrors one of the major market indices, such as the S&P 500 or the Dow Jones Industrial Average.

A mutual fund is a collection of many stocks, bonds, and possibly other securities, that you are able to purchase all together. When you buy index funds, you are essentially buying a small piece of the market, reflecting hundreds — sometimes thousands — of companies. This allows you to automatically have a diversified portfolio and eliminates you having to pick “winning” individual stocks and trying to time the market (that’s when investing becomes more like gambling).

The point is to buy and hold, and watch the magic of compound interest.

The “low-cost” in low-cost index funds does not refer to the amount you are purchasing the fund for, instead it refers to the amount you will be charged to manage the fund. This is referred to as an expense ratio.

While actively managed funds often have 1-2% expense ratios, a low-cost index fund’s expense ratio should be less than 0.2%, and are often lower than 0.05%.

If you are paying a financial advisor to handle your investments, you’re probably paying them an additional 1-2% of the value of your assets to do something that you can totally do yourself.

While 1-2% may not sound like a lot, that amount will eat into your growth, and over the lifetime of your investments can easily cost you hundreds of thousands of dollars.

Plus, you’ll often be paying for worse results. There are almost no actively managed funds that outperform the market in the long term (especially after accounting for growth lost to these fees!). Sure, they might have a good couple of years here and there, but averaged out over 10 years, very few fund managers can match, let alone outgrow, the S&P 500.

Myth #2: Investing is like gambling

When people think the stock market is like gambling, they are thinking of investing only as buying and selling individual stocks. It is difficult and time consuming to pick “winning” stocks and to time the market correctly — and nearly impossible to do so consistently. You will average far better results by sticking to low-cost index funds.

This is because when you purchase index funds, you are purchasing a large and diversified piece of the market, with small pieces of hundreds of companies. So yes, some of those companies might not do so hot, and some might even go bankrupt from time to time. But some of those companies will see massive growth, and most will see steady growth. You don’t have to worry about predicting which companies will do what because you have a piece of them all.

“Don’t look for the needle in the haystack. Just buy the haystack!”

John Bogle in The Little Book of Common Sense Investing

On the whole, the market goes up. Sure, the market is volatile, and day to day, month to month there can be massive dips and peaks. However, if you broaden the time horizon that you’re looking at, the market consistently sees upward growth. This growth tends to average out between 7-8% per year. Some years may be double that and some years may be in the negatives, but over time, you are almost guaranteed growth.

The secret is that you have to hold onto your investments and you have to be able to tolerate the short-term risks. Even if the stock market dropped 15% tomorrow, none of that loss would be real unless you actually sell your funds.

If you just keep your investments as-is and go about your life, market dips don’t mean anything to you (except perhaps a sale). If you continue your regular investment contributions when the market dips and most people are selling their funds at a loss out of fear, you’re able to buy those funds at a discounted price and enjoy the bonus of all of the future growth when the market rebounds.

This is why it is important to make sure you have an emergency fund saved before you start directing larger amounts to investment accounts. You don’t want to have to pull from your investments during a dip in the market, forcing you to lock in and realize losses.

However, you also want to be careful about how much you keep saved in a savings account out of fear. While some people are afraid of losing money in the stock market, over the long-term it is a small risk. The short-term volatility is not an accurate reflection of the risk level when you are using a buy and hold strategy and avoiding unnecessary fees.

In contrast, you are almost guaranteed to lose money when you have too much parked in a savings account. That’s because of inflation. If inflation averages 3% per year, then each year your dollars are losing 3% of their purchasing power. This is why it is so important to put your dollars to work for you through investing.

Myth #3: You need a lot of money to start investing.

If you have a retirement account through your employer, great! You can start investing today. When you enroll in your employer’s retirement program you’ll have to select which funds you want your contributions to invest in. They usually have a set of options to choose from. Look at what index funds they have as options and pay attention to what the expense ratios are. Choose a low-cost index fund.

The Vanguard Total Stock Market Index is a favorite among index fund investors, but there are plenty of other options if that isn’t included in your employer’s fund choices.

If you don’t have an employer account but want to start investing on your own, or if you want to open an IRA or taxable account you can do so with Vanguard, Fidelity, or Betterment. There are plenty of others out there but those are the three that I would recommend first.

You can open an account with Vanguard for nothing, but their mutual fund options have a minimum $1,000 balance requirement. Once you’ve met this threshold though, you’ll have access to some of the lowest expense ratios out there. A $3,000 account balance with Vanguard will automatically bump you up to admiral shares with even lower expense ratios.

Fidelity also has similar minimums to Vanguard, however, if you set up automatic monthly transfers the minimums are waived and you can begin investing in low-cost index funds with less than $1,000.

For someone just getting started, Betterment is a great option. It works off a flat 0.25% annual fee, and for this you will get a very user-friendly website, no required minimum account balance, and your investments will be split among various Vanguard funds depending on your chosen asset allocation.

Side bar: The Vanguard funds that Betterment invests in are actually ETF funds, not mutual funds. They are very similar with some differences, but I don’t want to confuse you today.

They still have low expense ratios, but often have lower minimum investments than index funds. So, if you opened a Roth IRA in Vanguard but didn’t have the $1,000 minimum to purchase their mutual funds, you could look at their ETFs as a similar alternative.

You can rebalance easily and whenever you want with Betterment, and there are no additional trading and transfer fees.  

If you made it to the end, I hope you feel like you know a little bit more about investing, and ideally feel confident to start yourself. Remember, what matters most is the time your money has to grow, so the sooner you are able to start the better off you are.

Future you will thank you, I promise.

PS — The Betterment link is a referral link. I wouldn’t recommend Betterment if I weren’t enthusiastic about it, and I think you will be, too!