How to Invest in Stocks or Index Funds: Investing 101

A lot of family members and friends come to me with questions about getting started with investing, buying stocks, or index funds. I'm always reluctant to give financial advice as the truth is, no one can predict the market or the future, no matter what anyone tells you. I also know that even if I give the best possible, most prudent advice possible and that person promises me that they understand and will stick to the plan no matter what, I know that there's a big chance they will end up doing something different and risk losing money. However, I've since realized that once someone has decided they want to start investing, nothing will stop them anyways, so I might as well be the one to help guide them the right way. This is why I'm writing this article today, as it'll be an easy way for me to simply forward this blog post to anyone, including my blood relatives and close friends who ask.

I'm not a financial adviser, fiduciary or a stock broker. I'm in most cases better when it comes to saving you money. I've met a lot of certified financial advisors, some of who worked for big investment companies and  can sadly say that 99% of financial advisors out there have no idea what they're talking about and don't even have any money of their own to invest. When advisors work for big companies like Merrill Lynch, they get trained to push you towards their high fee products that may have happened to do well the past couple of years, but probably won't in the future. The investment platform I'm going to recomend to you is a non-profit, which means as much as I'd love a commission for sending you there, they don't offer any. I'm only going to tell you the best advice and recomend what I have told my relatives and family members. Keep reading for the step by step guide on how to start investing. 

Step 1: Read and Plan

This is the step that everyone wants to skip as it sounds boring, but it's vital. I'm going to recomend one really easy book for everyone to read, and the book is going to repeat the same thing over and over again and try to drill it in your head. But the reason why it's so important is that if you don't fully understand and comprehend it, a future you may end up taking big gambles, financial risks or selling when you shouldn't. So do yourself this favor, read, or better yet, listen to the audiobook version of either: Tony Robbin's Unshakeable or if you prefer a softer approach, read or listen to The Simple Path to Wealth by JL Collins. Both are great, modern books that will give you the foundations on why investing in index funds is almost always better than trying to pick individual stocks, or pay or mutual fund managers. 

You should also at this point realize that whatever you buy is going to be a long term hold, so make sure you have at least 6 months to a year's worth of savings put aside somewhere so you never have to sell while the market is down. Interest rates change often, but check out online banks such as Ally or Marcus for savings accounts that may actually pay 1-2% interest instead of just sitting there. Now it's time to make a plan. I suggest anyone with less than $100,000 to invest who doesn't plan on retiring in the next 5 years to just choose something simple with high returns, such as put 100% of your investments into Vanguard's VTI which is a super low fee, total US stock market indexes that are diversified over 350 different stocks. You can plan to buy $1,000 worth every month on the 25th of the month no matter what, or even sign up for Vanguard's $3,000 minimum version named Admiral Shares (VTSAX), that will automatically buy that amount for you on an auto-invest. 

Then write down at what price and when you plan on selling the shares, and stick to it. To learn more about the basics of investing in stocks and index funds, listen to Episode 139 of the Invest Like a Boss Podcast. For me I know that as long as I hold the shares for at least 1 year, and only sell at a minimum of $150 a share, I'll be profitable as I don't have to pay heavy income tax on the gains, and at that price, since I bought in at an average of around $125 I'll be profitable. But my plan is to hold the shares long term and not to sell, definitely not when its down.

Step 2: Dollar Cost Average vs. Lump Sum

The next big question people always have is, "should I invest all at once" or should I slowly add it in? If you're using a robo advisor such as Wealthfront or Betterment, you'll always end up investing 100% of the money you transfer in all at once without even realizing it as there's not a second step with them and it's all automatic. However, if you're first transfering money into Vanguard or into a stock brokerage account, you'll first have to move money into their platform, then actually invest it.

Statistically you'll be better off putting all the money in as you'll be in the market longer and have it start earning you money sooner. However, I always advise to my friends to dollar cost average the money in. That means, put the same amount of money into your account every month for X amount of months until it's all in. As a minimum I would suggest 3-6 months of averaging in, so if you want to invest $100,000, you'll want to divide that into equal parts and invest them every month on the same day of the month no matter what the price is. This advice and strategy has personally helped a friend recently as she wanted to start investing last month and was tempted to put 100% of the amount in all at once. Luckily she listened to my advice and has been putting it in over the course of a few months to average it out as the market has suddenly dropped.

The problem with waiting too long to invest money as that generally the market grows, so you'll end up paying more investing on the way up. But by dollar cost averaging you might end up spending a bit more but will feel more at ease doing so. Take a listen to Invest Like a Boss Ep 16 for a full breakdown and backstory on why it's statistically a better idea to lump sum and invest all at once, and why despite that I still advise friends to dollar cost average in.

Step 3: What to invest in? 

The next big question is, should I buy individual stocks, mutual funds, or an index fund? The answer to that is actually really simple. Don't buy individual stocks unless you have insider information that others don't on the company and enjoy gambling. There is a lot of money to be made and lost buying individual stocks. I've gotten lucky twice buying Facebook Stock at $55 a share and then again buying Shopify Stock at $95 a share. But even then, I know I got lucky and it was a complete gamble. That's why I've stopped buying individual stocks all together and only invest in low cost index funds.

As far as mutual funds go, there is no reason to pay a fund 1% to manage your money. Instead I invest in low cost index funds such as Vanguard's VTI (total US stocks) or VXUS (total international stocks). Both have ultra low fees at .004% and .008% meaning it's just $4 or $8 a year for a $10,000 investment. Historically the total US stock indexes have gained 7-10% a year on average even accounting for the down cycles.  If you think you can beat that by investing in individual stocks, weed funds, bitcoin, or alternative investments, I encourge you to read Money Master the Game which has dozens of examples of why even the best hedge fund managers and investors out there cannot consistently beat the market. 

Unlike cryptocurrencies, baseball bards, beanie babies, gold coins, and other collectables, stocks aren't just items to hold and look at in hopes they appercaite in value. A share of stock is a part ownership in a revenue generating business that is creating income, and often paying out dividends and generating profit. Owning a share of VTI is like owning a small fraction of Microsoft, Apple, Google, Amazon, Chase, Visa, Facebook, and Procter & Gamble Co., makers of Crest toothpaste, Febreze, Gillette shavers, Olay, Oral-B toothbrushes, Pantene Shampoo, Tide detergent, Vicks vapor rub and other consumer products. So as long as you think these along with 3,500 other US based companies will continue to generate sales and not all go bankrupt, then the stock prices will continue to be worth more as the company's are worth more, even with the ups and downs of the economy. Watch or listen to my quarterly updates on Invest Like a Boss for everything I invest in, but as far as stocks go, it's simple, 80% VTI (total us stocks), 20% VXUS (international).

The reason why I don't invest in or recomend investing in Bitcoin or any other Cryptocurrency is even though blockchain technology itself will have good use cases in the future, right now as of 2020 most cyrpto evangelists are only promoting and trying to get others to invest to artificially raise up the price of the coins they already own. It'd be like if we invested in an AI company that has future potential but doesn't actually produce yet, has zero revenue, and the prices only go up because the other enthusiast and investors keep touting how amazing it is and that it costs a lot of money in electricity to issue new stocks and that the total number of shares are limited. I'd much rather invest in a company that actually makes and sells something now, which is why I invest in actual companies through the stock market.

My Vanguard Index Fund Account

Step 4: Diversification

As mentioned in the previous step above, just by investing in VTI you  are already diversified over 3,500 companies. If you also invest in VXUS, you're now diversified in 7,377 international companies incuding Alibaba, Nestle, China's Tencent, Samsung, Toyota, HSBC, and others equalling 99% of the world's total market cap of international companies. If you invest with a Robo Advisor, you'll automatically be forced into more diversification as they will buy bonds and other assets for you as part of the plan. In general as long as you aren't planning to withdraw any money or sell stocks in the next 5 years, you can safely be in 100% stocks and not worry too much about future diversification.

However, one of the reasons why I like co-hosting the Invest Like a Boss Podcast which was named Top 8 investment podcasts by The Balance two years in a row now, is the fact that it's so easy now to find alternative investments and further diversify. For the past few years everyone thought the stock market was too high and were afraid to invest. It turns out that in the years of waiting around, their money not only lost 2% due to inflation but another 2% in dividends that were paid out quarterly since then. Even though the cost of the funds is currently down by 30% as I write this, the fact is, as long as I don't sell any of my shares, I'm still in a good place as my shares are still earning me dividends and I still technically own the exact same amount of shares that I did before. Right now I can just buy even more at a lower price, bringing down my average purchase price, and keep holding until the market recovers as it always has and goes back up to a point where I can sell for a profit.

But honestly, even knowing that, for the past few years, I have been diversifying outside the stock market. I have 6 months of living expenses in a savings account as a backup. I have 50% of my money invested in real estate funds, notes, peer to peer lending, and other investments that aren't correlated with the stock market. However, if you have less than $100,000 in total net worth, I would honestly just start with 100% stocks as it's the easiest to understand, anyone can invest even without being accredited, and it's relatively simple to understand while still being diversified. Take a look at my quarterly update videos for a full breakdown of everything I personally invest in.

Step 5: How to Start

First you'll want to calculate how much you'll need to comfortably live for 6-12 months without any income and without needing to sell any investments in case of emergency. Put that money in a high interest savings account such as Ally or Marcus bank and don't touch it.

Second, you'll want to decide if you want to go through a Robo Advisor like Wealthfront or Betterment or if you want to invest directly with Vanguard. If you're outside of the US, you can still buy Vanguard funds through interactive brokers or your country's equivalent.  

The benefit of going through a Robo Advisor is that you can set it up and forget about it. They will automatically withdraw a set amount from your bank each month, invest it for you, and rebalance your portfolio. It's basically like having the benefits of hiring a financial manager without the high fees.  You can listen to an interview with Wealthfront's CEO on Invest Like a Boss for more details. 

For those who can trust themselves to log in each month to invest without panicking and selling prematurely, it's generally better return wise to invest directly through Vanguard as you'll pay lower fees and be able to invest in 100% stocks which even the highest risk tolerance level at the robo's don't allow. Watch the video recording of my talk at the Nomad Summit conference for more details on why getting started with investing now is something that you need to take seriously and why you'll regret not doing it sooner if you wait a few more years to start. Also listen to episode 139 of the Invest like a boss podcast where Sam and I breakdown everything in this article in even more detail.

Step 6: Investing During a Recession

This is a bonus step that applies right now as we're currently going through a market downturn because of the COVID-19 outbreak.  First off remember that everything above still applies, and the foundations and fundamentals are the most important part never to forget.

The only things I would do differently during this time are to have an even bigger buffer of an emergency fund as no one knows if this recession is going to last 3 months or 3 years. The worst thing you can do is be forced to sell stocks while prices are low, especially if they dropped even further from where you bought in at. 

Other than that, I would still buy 100% stocks as normal, avoid individual stocks as they are a gamble, and continue to dollar cost average into the broad funds. If you have extra cash and to be aggressive like I have been, you can set "buy limit orders" that are good for 60 days, which means you can set your account to automatically buy more stock as the price drops, even while you're asleep during market open. I had mine set to buy more shares when VTI dropped from $171 down to $135, $125, $115 and still have buy limit orders set for $110, $100, $100, $90 and $85. That way I can dollar cost average on the way down as the "knife falls." 

No one knows how far the market will drop and how long it will stay down for. But if you follow my advice above, you can potentially make a lot of money as long as you can hold the shares for 6-36+ months as the market recovers. Personally I will buy more shares of both VTI and VXUS during this time. Let me know what you plan on investing in yourself. 

How to set an auto-buy limit order in Vanguard

Final Thoughts

I sincerely hope this write up helped. Read the books mentioned in the write up above, then feel free to ask me any questions you may have. I'm very fortunate that early on in my investing career I had mentors such as JP and Ed who helped guide me though it all, have helped me make a lot of money and avoid a ton of mistakes. The private jet below is with JP and the video explains how I first got started with investing, as well as a bit about my journey buying and selling individual stocks. 

I'm happy to help you get started as well, so feel free to leave a comment with any questions you may have.

Warm Regards,

Johnny FD

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  1. Hey, Johnny. I invested in VTSAX. Is there a reason you went with VTI over VTSAX?

    1. They are the same when it comes to the 3,500 stocks inside the fund and the expenses. When I first started investing, I didn't have the $3,000 minimum for VTSAX.

      The benefit of VTSAX is that you can set your Vanguard account to automatically buy more shares every month on the X day of the month.

      The upside of VTI is you can set buy orders to trigger whenever the share hits a certain price.

      VTSAX has a 0.04 fee while VTI has 0.03 which isn't actually a big deal as it's a $10 difference per $100,000 invested per year.

      Either fund is fine, VTSAX is better for those who want to set it and forget it. VTI is better for semi-active investors like myself.

  2. Hey Johnny, great post appreciate it a lot!
    I’m an expat based in Shanghai, China and most of my money is in RMB. I’m not a US citizen. Seeing as getting money out of China is a bit of a hustle, would you suggest investing in the Chinese stock market, or should I find a way to get my money out of China and invest in the international market?

    1. There is no one answer fits all. It basically depends of what you think of the Chinese economy.

      However, as a starter I'd diversify for the widest ETF possible and then start looking at other option.

      BTW, It could be that the Chinese stock market also has ETFs of some sort following world / region indexes but are prices in RMB.

    2. Shlomo offered some good advice that I'd follow. But personally either way, I would keep at least 50% of my money outside of China and RMB. I don't know the exact methods for Chinese citizens to invest outside of the country as I know they make it difficult, but I'd make a priority to get 50% or more of your money out of RMB and info US, or international stocks or real estate.

      Just be careful not to overpay for things as I know a lot of people in China buy property that is way overpriced just to get their money out. If you want a trusted real estate agent in California, my cousin is one in LA.

  3. Thank you for this post Johnny. I wish I would have taken this advice and used it 10 years ago, but you live and you learn.

    1. Better late than never right! Plus this might be your second chance during this downturn. =)

  4. Hi Johnny,

    My take is that stay invested in stocks. Remain diversified in the stock counters. This is equivalent to avoiding to put all eggs in one basket.

    My two cents worth of views.



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