How to pick what to invest in

To bake that bread you needed to understand the ingredients. Stick with us to master the necessary ingredients to build a smart, beginner’s investment portfolio.

🍹Refresher… If you missed it, we chatted about how to open an investment account here. The takeaway is that it's easier to open an investment account than coming up with TikTok moves. Instead of stock-picking (no one needs to be a trader to start investing), we should invest in pre-made baskets of stocks called funds or ETFs.

Similarity: Both are mixtures of many different investments pooled together, as an automatic way to diversify (aka invest in different things to lessen overall risk).

Difference: Mutual funds are considered “active” because a human (fund manager) creates and manages these pools (or baskets) with the goal to “beat the market.” ETFs are considered “passive” investments because they are computerized and made to move WITH the index it tracks (ex. if you own the S&P 500 ETF, you go up when the S&P 500 index does).

Main point: Mutual funds can be more expensive because of the work that goes into managing them to try to beat the market. The keyword is “try” - data shows only 1 in 20 funds actually do it. Our Take? Mutual Funds: 0 ETFs: 1.

💡Pro Tip: If you look at a ticker it’s easy to tell if an investment is a mutual fund or ETF. Mutual funds usually have an “X” at the end of their ticker (ex. VBIAX, VIMSX) while ETFs don’t and are usually 3 letters (ex. SPY, FDN).

Q: I hear words like “mutual funds” and “ETFs”. What’s the difference?

Q: When I pick my first funds/ETFs, what should I look at?

To see it IRL, check out this Vanguard fund example or lean on a site like Morning Star that gives you the low down on all things ETFs including risk levels.

Q: What are the specific ways to diversify?

Best way to diversify is to have lots of irons in the fire. Here are all the options you can have:

🌎 Geography - Prevents concentration in one country.

💡Pro tip: Google MSCI World Index and see what their US vs International breakdown is and follow it (currently it's about 60%US and 40% Intl).

🏢 Industry - When COVID kills retail, maybe you’ve got some big tech like FB & Zoom.

💡Pro tip: When looking at ETFs to invest in, look at their “sector breakdown”.

⚖️ Market Capitalization - Fancy way of saying company size.

💡Pro tip: None. Not your highest priority but good to keep in mind.

🚨PSA: Another way to spread out the risk is diversify WHEN you throw in your irons. By spacing it out in regular intervals (ex. investing $200/month for the next 5 months) you prevent obsessing over timing the market (which few people can do). This strategy of all calm wealth-builders is called Dollar Cost Averaging.

Keep in mind that every investment you make won’t be a homerun (no one’s are). But lucky you, you’ve got time and us on your side.