Category Archives: Investing

Investing 101: It’s Not That Hard

If you’re new to investing in the stock market, the terminology and numbers might scare you at first sight. Fancy math, charts with patternless lines, PhDs in fancy suits. I have news for you: it’s all a facade. The secret is that over 90% of these guys with their quantitative models and algorithms can’t even beat the benchmark index with any consistency. If you’re out trying to get rich trading marijuana stocks and alt-coins, the data shows that the odds are so stacked against you that it’s not worth the time or the stress. The failure rate is around 98%. Here’s a quote from famous investor Warren Buffett:

“The 21st century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners — neither he nor his ‘helpers’ can do that — but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”

The reason why active managers are so bad at doing their job has nothing to do with their intelligence. In fact, it’s the most brilliant guys that are susceptible to failure at short term investing or trading. The reason is that human nature and trends are so unpredictable and random in the short and medium term that it turns stock picking into nothing more than guessing using fancy math and fundamentals. If you throw in human emotion, in only compounds the problem further. The market has a way of exploiting ego and eating alive the folks that are 100% certain of their picks in a completely uncertain environment. Here’s another quote from Uncle Warren:

“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

So how do you make money in what seems like a floating casino? It’s pretty easy, actually. Just keep it simple. Let’s use my mother, for example. If you asked her to give you the ticker of any company in the S&P, she probably couldn’t do it. She’s also made, on average, about 12% annually over the past 15 years. Past performance is not indicative of future returns, but on average the market returns around 8.5% annually. The key word here is average. There will be bumpy roads ahead, and the headlines will not help.

stock market chart

Here’s a chart of the overall market since 1900. Through thick and thin, we’ve weathered every war, crisis, disease, political scandal, and bubble to date. That’s not to say there’s no significance in the issues that I just previously listed, but they are issues that aren’t capable of knocking the overall market off of it’s long term trajectory. They are issues that are of tremendous value to media outlets in efforts to catch eyeballs and clicks while at the same time stirring up some entertaining water cooler material.

A solid investment strategy really revolves around keeping it simple and detaching yourself from the short-term noise. Buying a simple index fund, or portfolio of safe large cap stocks on a recurring basis is a proven investment method. Whether it’s on a monthly or quarterly basis, with $100 or $10,000, the return on your investment over a longer time frame will surprise you, and there’s no better time to start than right now. Vanguard and Fidelity are the popular places to buy cheap index funds, but be on the lookout for some special offers that you can take advantage of. Brokers are at war with each other in customer acquisition.

My 9 Month Old Daughter Is Funding Her Roth IRA

My daughter is the newest start of the CW show Jane The Virgin. For those that don’t watch, it’s a satirical comedy-drama telenovela that is currently in its 3rd season. While Gina Rodriguez is the lead, the show needed some serious star power, so the producers called baby Elianna in.

How Did She Get Involved?

We live in Los Angeles, so at the hospital, babies are assigned an agent as they exit the womb.

I kid, we signed up with an agent her cousin used a few years ago. We were hoping for a few print ads, maybe get her picture on a product box, and frame that. Lauren took a few months off from work, so it was sort of perfect for her situation. Every few weeks, we received an email for an audition, and Lauren and Elianna went in and posed for a few pictures. Those never turned into anything major, but then we received the email for this opportunity.

I guess they needed a white baby with blue eyes and she fit the bill. There was no audition, they must have seen her picture and known that she was born to play this role. In the show, there are a set of twins, and Elianna plays one of them. She’s already been in two episodes, and may appear in another one or two episodes later in the season.

How Much Does She Make?

Not enough! We went into contract negotiations with a very hard line stance and came out with exactly what they give as standard to all background baby actors: $250 for each taping, which can last up to 4 hours. Sometimes she would be filmed for 15 minutes, sometimes they’d have to do the same scene over and over because one of the babies was babbling, and sometimes they wouldn’t even use her and she’d take a nap in another room, counting her hard-earned cash in her dreams.

In all, she went in 9 times, earning herself a cool $2,250 (minus 10% to her agent).

Starting A Roth IRA

What are we doing with this money? First, we created a separate bank account for her, to keep it separate and easy to track. Then, it goes directly to a Roth IRA for her. You can contribute all income earned from work (up to $5,500) to a Roth IRA in 2016, so everything she earned will go straight to her account. We’re opening an account for her in Vanguard, and since we don’t plan on touching this until she’s at least 18, we’ll invest it aggressively and hope that the magic of compound interest works wonders for her.

What’s Next For Her?

For now, she’s going out on top. She gave it all she had, but with Lauren being back at work, Elianna has retired to the comforts of sipping milk in daycare, and we don’t have any plans for additional work. It was a fun ride while it lasted and I find it hilarious that she’s been on TV, but it’s time for some younger actors to have their chance.

A Beginner’s Guide to Index Funds

A Beginner's Guide to Index FundsIf you have more than a few months of savings in a checking or savings account (and have a pretty stable situation), you should consider investing your money. Once you have an emergency fund saved up, it’s time to put your money to work. Your money should earn money, and the best way to do that is investing.

You may be a novice, but by now you should know the basics of investing. The best part about investing these days is that you don’t need to be an expert. In fact, you don’t even need to know what you’re doing, because there are systems in place that can take care of everything for you. I’m someone who is constantly plugged in to Wall Street, and yet I still rarely pick stocks. Why? Because I like diversity, and why invest in one stock when I can invest in hundreds? This is exactly where index funds become our best friend

If the stock market bewilders you, don’t feel bad. Understanding the inner workings of the market takes dedicated study and constant attention and it’s not for everyone. We don’t need to pretend that we’re better at picking stocks than someone who spends all day researching. Most people don’t have the time or money to make consistently profitable decisions on individual stocks; index funds exist for that very reason.

What is an Index Fund?

To better define an index fund, it’s important to know what both an “index” and “fund” are within the context of the stock market. A stock market index is the valuation of an individual section of the stock market based on the prices of certain selected stocks. Unlike a mutual fund, which is comprised of stocks selected by a human person (or group of people), an index fund is managed automatically by computer. There are global indices, national indices, and indices that track specific market sectors. You may have heard of the S&P 500 or Russell 1000. These are examples of index funds that contain (you guessed it) 500 and 1000 stocks, respectively.

A fund is simply a large repository of capital that belongs to many investors and is used to purchase stock. This arrangement gives individual investors more opportunities to diversify their investments. If you buy one stock and it doesn’t do well, you could be out a significant amount of money. But if you spread your money throughout many stocks, you’re spreading out your risk. The likelihood of many stocks tanking is much lower than the likelihood of just one stock decreasing a lot.

Index Funds vs. Mutual Funds

So, if an index fund is run by a computer and a mutual fund is run by a person, which one is better?

With an index fund, the goal is to match the performance of the index. If the index increases by 6% in a year, the index fund should increase by 6%, too.

With an actively managed mutual fund, there’s the chance to beat the market. But pound for pound, index funds have a reputation for outperforming managed funds over-time. On top of this, index funds allow you to succeed on the stock market with virtually zero experience. In addition, index funds usually have super low fees (as low as 0.05%), while mutual fund fees regularly exceed 1%.

The Benefits of an Index Fund

Warren Buffett, the world’s most famous investor said it himself: “Just making monthly investments in a low-cost index fund makes a lot of sense.” Why? Because “Owning a piece of America, a diversified piece, bought over time, held for 30 or 40 years, it’s bound to do well. The income will go up over the years, and there’s really nothing to worry about.” In fewer words: keep it simple, stupid. Quite often, the easiest approach is the best approach, especially for the beginning investor.

Where to Get Started

Getting started with your first index fund is designed to be easy. Take a look at some of the more popular index funds, like the Vanguard 500 or Fidelity Spartan 500 and you’ll find that both the risk and the barrier to entry are very low.