Invest Like a Pro: A 10-Day Investing Course

by Jesse Mecham

You are at the mercy of the Market Gods at this point. You have NO CONTROL o...

Be Lazy In the end, when it comes to investing, I want you to be lazy. Put things on autopilot, set it, and forget it.

Investment Types

Stocks

With a mutual fund, many investors pool their money and then the fund purchases investments on behalf of the investors. The fund bears its own expenses (remember a few days ago, where we talked about investment expenses). This allows you to purchase one share of a fund, and have that share represent a lot of separate stocks.

My favorite kind of mutual fund, is the kind that isn't actively managed by an investment team, but is passively managed.

Less trading means less expenses.

Index funds are mutual funds that automatically invest in all of the companies in an index, or list.

The S&P 500 is an index (list) of 500 top publicly traded companies in the US, and is maintained by Standard & Poor's (a private company).The S&P 500 index is based on the market value of the 500 companies chosen by S&P.

There's another group of mutual funds that are not actively managed. They're called "passive funds." Index funds are passively invested.

I'm a huge fan of passive investing because: •It's completely hands-off. •Fund expenses are lower. •Your investment performance improves*

*That's IF you follow the principles outlined later in this course. If you "actively manage" your passive funds by jumping in and out of them every other week, you're kind of your own worst manager at that point.

Index funds are, in my book, a great way to passively invest. And passive investing, in my book, is a sure-fire way to outperform almost every other investor out there.

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals." - Warren Buffet, 1997

William F. Sharpe, a Nobel Laureate in Economics? He said: "Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement."

Burton Malkiel, author of one of my favorite investing books, "A Random Walk Down Wall Street" says this: "...Experience shows conclusively that index-fund buyers are likely to obtain results exceeding those of the typical manager, whose large advisory fees and substantial portfolio turnover tend to reduce investment yields."

Exchange-Traded Funds (ETFs) ETFs are also mutual funds, but they're traded like stocks, and have some very attractive advantages that normal mutual funds just can't beat.

ETF expenses can't be beat

ETFs usually have expenses around one tenth of one percent.

the expenses you pay can have a massive effect on your returns over a long period of time.

More tax-efficient than a normal mutual fund

ETFs are tax efficient as long as you don't sell them. If you're buying and selling constantly, then you'll be paying taxes on any gains.

Beware of trade commissions

My recommended way to invest in stocks, is through ETFs.

Owning a stock makes you part-owner in a company. They're risky in the short-term. Less-risky in the long-term. You can't predict how a single stock will move over the short-term, and over the long-term, you can't either. When investing in stocks, you should be well-diversified

The best way to invest in stocks is passively. The best investment type for diversified, passive investing, because of its tax efficiency and extremely low expenses, is ETFs.

bonds! No worries. They're just a fancy way of governments and corporations saying, "We want to borrow some money," and the buyers saying, "We want to lend it to you!"

Bonds

Lending money to corporations and governments

A Quick (honest!) Example

Let's use YNAB as an example. YNAB wants to issue bonds, to borrow some money, to buy an office building (we would never borrow money in real life, to be honest). So we go to the bond buyers and say, "Hey, if you'll each lend us $1,000 we promise to pay you 7% interest." We issue 100 bonds, we have 100 bond buyers, and those bond buyers will all be paid 7% interest. That interest is called the coupon rate. YNAB gets $100,000 total (100 bond buyers * $1000 bond value), and each buyer can expect $70 of interest payments (7% * 1,000) each year.

Bonds are less risky than stocks, but there are still risks! If you own a bond, you're worried about three things: •Default risk. If the company goes bankrupt, they may not be able to pay you back. Your initial investment, and the future interest payments that investment would have earned, would be lost. •Interest rate risk. You may buy a bond from YNAB at 7%, and then watch as interest rates rise across the market! Suddenly, you're stuck with a 7% payment on your $1,000, while your neighbor (who doesn't even cut his grass!) invests in a bond that's paying him 10%. •Inflation risk. We talked about this risk as it relates to your overall investment return, but it specifically affects bonds. In an environment where a dollar buys less and less each day, the $1,000 you invested that bought a nice computer ten years ago, may only be "worth" $750 when it's paid back to you.

Government bonds carry the least risk (and lowest return, as we've discussed). A federal bond is less risky than a municipal bond, because the municipality may become insolvent, but the federal government will never become insolvent.*

Corporations have different credit ratings, just like your own personal credit score. So according to those ratings, bonds from some corporations are less risky than bonds from another. Corporate bonds are riskier than government bonds, because corporations can fail and end up not paying their bondholders.

Bonds are less volatile than stocks, and certainly belong in a well-diversified portfolio. Because they are less volatile than stocks, they're used to make a portfolio more conservative. The same rules that apply to stocks apply to bonds: there are inherent risks, you want to diversify to spread those risks, and you want to invest in bonds passively. Luckily, there are ETFs for bonds as well, that let you instantly diversify, and invest passively.

The risks with bonds are obviously still present in a bond ETF.

investments (stocks and bonds), and investment vehicles (a Roth IRA).

A checking account holds cash. A 401k holds mutual funds. You don't invest in a 401k. You invest in a stock or bond, which may or may not be held in a 401k. Investment vehicles just drive the investments around. Different vehicles are headed to different destinations.

Investment Vehicle Destinations These destinations offer great ways to "get away" (see what I did there?) from some tax liability, which is always a great thing. Most of these vehicles mainly have something to do with your tax bill.

Tax-Deferred (Investments pay tax after they get out)

Roth IRA is taxed *now* with tax-free growth.

•Roth 401k (or equivalent) up to the match. •Traditional 401k (or equivalent) up to the match. •Roth IRA up to the maximum. •Roth 401k (or equivalent) up to the maximum. •Traditional IRA up to the maximum. •Traditional 401k (or equivalent) up to the maximum. •Traditional non-deductible IRA up to the maximum. •Just invest without an investment vehicle.

Conclusion Investment vehicles are not investments! Vehicles just change the investments' destination. Some destinations will be taxable deposits and tax-free withdrawals, others will be tax-deductible deposits, and taxable withdrawals.

In the end, use these vehicles if they're available to you. They'll help you cut down on one of the biggest investment costs you bear: taxes.

What were our five components of an investment?

Time

In order to do this correctly, you have to start. Today. You cannot beat yourself up about not starting yesterday, or ten years ago. Think about it this way: The only correct time to start, is right now.

Amount

Return on Investment

What aspects of the return do you control? Expenses, your asset allocation (discussed above), and your tax situation (to a lesser degree).

Market Performance

This is the elusive, sexy, dinner-table-conversation starter, and is not in your control. At all. You cannot predict the occurrence of events that will drive the market's desire to buy or sell stocks. You are in it for the long haul, wanting a small piece of the returns generated by the global stock market (because you're diversified, you get a piece of virtually everything).