Investing is the part most people think is the main event in personal finance, but it’s the habit of spending less than you earn that gives you something to invest in the first place. For a steward, investing is about putting money to work so you can stop thinking about money - building enough of a base that works for itself while your attention stays free for things that actually deserve it.
There’s a real line between letting money work for you and setting your heart on building bigger barns, something I constantly need to be reminded of.
Investing in assets
Back on the peach farm, we find a big difference between simply having some peaches to eat and owning the ability to produce peaches year after year. If I own land and peach trees and some equipment, I can have peaches to trade year after year. If I run things well I could even expand to apples and pecans, hire more people, buy more land, and so on. The peaches that come from the farm may not last long, but the promise of future production and growth makes the farm extremely valuable to own.
So it goes with assets you can own, which is a fancy way of saying “different things you can buy that might be worth more later.” Assets tend to grow in value because they are scarce, hard to replicate, and contribute value to society. This happens over a long period of time with wild up and down swings in the short term. Anyone promising get-rich-quick schemes in investing is either delusional, playing a different game than you, or trying to sell you something (if not all three).
TL;DR: Most beginners should buy low-cost stock index funds and hold them forever. Everything else in this post is just context and options.
Why not just keep cash?
Keeping all your money in cash is a guaranteed losing strategy.
The US dollar has lost about 99% of its buying power over the last 100 years. That’s with the US being the world’s currency and basically winning the 20th century. In places with less stable governments, people have seen their currency become totally worthless in a matter of hours (in extreme cases).
Cash is certain death by a thousand slow cuts. Every year, inflation eats away at what your dollars can buy. You need some cash on hand for expenses and emergencies, obviously. But money you won’t need for a long time? That needs to be working for you, not sitting there losing value.
Compound Interest and expectations
When you put money into assets you hope that it will grow a little each year. Each year’s growth builds off the previous year and the results compound over time. If I have an investment of $1,000 that grows 10% every year:
Year 1: $1,000 grows to $1,100, $100 of which was investment gain
Year 2: my original $1,000 still grows at 10%, but so does the extra $100 from last year. $1,100 grows to $1,210
Year 3: $1,331
Year 5: $1,611
Year 8: $2,144
Year 15: $4,177
Year 20: $6,728
Year 30: $17,449
Year 50: $117,390
By the year 8 mark, my money has doubled in value. If left for decades, the small investment of $1,000 compounds to a massive sum. Inflation eats away about 3% a year, so 10% growth with 3% inflation still nets out to a cool 7% return, but you get the point - given long periods of time, money multiplies on itself.
In reality, nothing ever compounds at exactly 7% every single year. It may go up 15%, then down 8%, up 4%, down 6%, up 22%, then down 30%. The short term ride is full of booms, busts, hype, FOMO, greed, panic, and all the other emotions people and markets go through as we all respond to global uncertainty.
The big takeaway on compound interest is that you have to stay in the game long term to get the multiplying effects, and pulling money in and out to time the market is attempting to do something that not even the most elite professionals can do consistently over the course of many decades. If you time the market wrong and miss out on the best few market days each year, you miss most of the total gains in a year. If you want to time the market, keep some cash on the sidelines and buy dips. Once you have money invested, grit your teeth, ignore the news, and know it’ll be a wild ride (but you don’t have to pay attention).
Stocks
When you buy a stock, you’re buying a tiny piece of ownership in a publicly traded company.
Own Apple stock and you own a small slice of Apple. You technically get a say in how the company runs (you can vote on things, attend shareholder meetings). The more stock you own, the bigger your slice and the louder your voice.
When the company does well, your slice becomes more valuable. When it does poorly, your slice loses value.
Stocks are volatile and prices can fluctuate wildly for both real business reasons and internet echo-chamber reasons (think GameStop). It is possible to buy a quality company with an over-priced stock, leaving it stagnant for years.
What people mean by “The Market”
When people say “the market,” they’re usually talking about the stock market as a whole, often represented by a collection of the 500 largest publicly traded companies in the US called the S&P 500. Think Apple, Microsoft, Amazon, Tesla, all the household names and a bunch of unfamiliar ones. The S&P 500 has historically returned roughly about 7% every year accounting for inflation. Almost no year is exactly 7%- some years it’s up 30%, some years it’s down 20% - but over long periods like 20-30 years it has averaged to about 7%. When you hear people say “just invest in the market,” this is what they mean. Not picking individual stocks, but buying a broad basket of stocks that represents the overall stock market.
Individual stocks vs index funds
If you are picking stocks, it is really hard to consistently pick winners. You might get lucky once or twice, you might even beat the market for a few years. But over long periods, almost nobody beats the market consistently, not even most professional fund managers who do this for a living.
That’s where index funds come in. An index fund owns a little bit of everything in a particular index (like the S&P 500). Instead of trying to pick which 10 companies will do best, you just buy all 500 of them. Or all 3,000+ in the total US stock market. Or all 10,000 companies in the entire world market. Buying index funds blows past the deep, complicated analysis that individual stock picking requires. This means within the index you’re likely buying some bad companies, but expecting the returns on the good ones to overshadow the bad ones.
Index funds come with low fees, instant diversification, and give you exposure to entire markets without needing to be a stock picking genius.
Individual stocks require lots of time and expertise to evaluate, as well as the guts to hold on to your convictions and the humility to admit when you’re wrong and sell. Every time I have picked what I thought was a no-brainer stock (Alibaba, Microsoft, Tencent) I have come to regret it as I bought at peak hype and watched them perform worse than simple index funds.
Some people love picking stocks and do well. But for most beginners, index funds are the way to go. You get the returns of the overall market without the stress, time commitment, or risk of putting all your eggs in a few baskets.
Bonds
Bonds are basically loans where you’re the lender.
When you buy a bond, you’re lending money to either a government or a company with the promise they’ll pay you back with interest. The bond tells you exactly how much interest you’ll get and when you’ll get your money back. The safer the borrower, the lower the interest rate. Lend money to a sketchy company or an unstable government like Argentina? They have to offer you a much higher return to convince you to take the risk because there’s a real chance they won’t pay you back and you’ll lose your money.
Bonds are more stable and predictable than stocks, which is good for money you’ll need sooner or for balancing out a volatile stock portfolio. Their lower risk profile also comes with the downside of lower returns (you’re trading the explosive growth of stocks for more safety in bonds). They are best for money you may need within a few years, or for balancing your overall portfolio for risk as you get older.
Real Estate
Real estate is something most people intuitively understand because we all live somewhere. This includes single family homes, apartment buildings, duplexes, commercial real estate, and everything in between. You can invest by:
• Buying your own house (which is an asset, even if it doesn’t feel like an investment)
• Buying rental properties
• Flipping houses
• Investing in real estate syndications (where people pool money for bigger deals)
• Buying REITs (Real Estate Investment Trusts) in your brokerage account, which are like stock market versions of real estate
Real estate generally keeps pace with inflation and houses tend to hold their value over time if kept up well. The downside with real estate is it often involves leverage, where you can lose your money for a lot of reasons out of your control.
The earth is constantly trying to take back its materials and appliances are designed to die on a timeline. All this means a steady stream of fixes and replacements which require immediate cash flow. You could invest in syndications or REITs to let someone else worry about all that, but these not liquid and it can be slow to get your cash back out.
Precious Metals
Gold, silver, platinum, and other scarce metals that are hard to mine and can’t be printed by governments. Gold has been a store of value for thousands of years of human history. It’s heavy, hard to make more of, doesn’t rust or decay, and isn’t particularly useful for making everyday stuff, so people are incentivized to just hold it.
When everything else is falling apart (economic crashes, currency collapse, apocalypse), gold tends to hold its value. But gold itself doesn’t do anything - it just sits there. A bar of gold today is the same bar of gold in 30 years, so you’re hoping someone will pay you more for it later. Given its history of storing value, gold could be a potential small portion of your portfolio as disaster insurance (but not your main investment strategy).
Cryptocurrency
Crypto is both worth paying attention to and worth treading very lightly. The field is constantly evolving, so it is impossible to cover all of it here. But know that crypto is an emerging asset class full of both revolutionary money concepts and also all sorts of scams and people trying to profit off of FOMO and greed. Even established cryptocurrencies like Bitcoin and Ethereum are themselves full of unknowns and risks. Add in Meme coins, CBDC (Central bank Digital Currency), and Stablecoins; and you quickly go down a huge rabbit hole.
If you pick right, the returns can be massive. Bitcoin went from pennies to tens of thousands of dollars. On the other hand, almost all of crypto is extremely speculative right now. It’s unpredictable and you could lose everything. Treat crypto as highly speculative and stay away with anything you can’t afford to lose completely.
Assets vs Liabilities
Not everything you buy is an asset. Assets put money in your pocket or grow in value over time. Stocks, real estate, businesses - things that grow in value over time or generate income. Liabilities take money out of your pocket or lose value over time. This is stuff that depreciates, costs you money to maintain, or just sits there losing value.
Common liabilities people think are assets
Cars, boats, RVs, ATVs, clothing, electronics, gadgets, furniture, home decor. Almost all of these lose value the second you buy them, unless you score big and find a truly rare antique (but that takes a niche skillset).
What you’ll actually have access to
Most investors will be working with retirement accounts (401k, IRAs, HSA) and brokerage accounts. Through these accounts, you’ll have easy access to:
• Stocks
• Bonds
• Some real estate exposure (through REITs)
• Maybe some commodity exposure (gold ETFs)
• Maybe some crypto exposure (Bitcoin and Ethereum ETFs)
You probably won’t be buying Picassos or Argentinian government bonds through your Fidelity account and that’s fine. Stocks and bonds are enough for most people.
Active vs Passive investing
Some asset classes require active work, others don’t. If you buy index funds that track the stock market, you’re doing basically nothing except holding. You may get 7% yearly returns averaged out over a long period of time - not bad for sitting on your hands.
If you’re flipping houses or managing rental properties, you’re actively working and its more like a second job. You’re finding deals, negotiating, managing contractors, dealing with tenants, and adding extra stress.
So if you’re going to do the active stuff, you should expect meaningfully higher returns than just buying index funds. Because what’s the point of remodeling a house if you’re only making 7% when you could have made 7% doing nothing?
Some people love active real estate investing and do great, but many people find that index funds give them perfectly good returns without the stress, time commitment, or expertise required; and prefer to focus on their savings rate as the main lever to propel them forward.
The Risk Spectrum
The greatest risk is doing nothing with cash as it slowly loses its purchasing power to inflation, waiting for a “safe” moment to invest that may never come.
Every asset class has risk. Even bonds (governments can default, interest rates can shift) and even real estate (markets crash, neighborhoods decline, and the earth is constantly trying to reclaim its materials).
At the safest end you’ve got government bonds and high-yield savings accounts. Step up from there and you get stock index funds, corporate bonds, unlevered real estate. Keep going and you’re in individual stocks, emerging markets, precious metals. At the riskiest end you have crypto, startups, collectibles, anything with leverage — these can go to the moon or go to zero, and you should treat them accordingly.
I personally am almost entirely in the middle band with diversified stock index funds.
Just get started somewhere
You can spend forever researching asset classes and optimal allocations and risk-adjusted returns and blah blah blah. Investment returns are wonderful, but especially in the beginning the most important thing is your savings rate and how much you shovel into investments. Pick a simple total market fund to get started and focus your attention on your income and expense levers that free up money to even have the option to invest.
The more margin you build, the more you have to work with — to give, to weather hard seasons, and to pursue things with your time that really matter.