Investing. This is one concept that intimidates a lot of people. Most of us did not learn about investing from our parents or in school. It seems very complex, with jargon that makes even some most educated people feel inadequate. I know this, because they told me.
Many of the parents who attended my workshops over the past years have told me that investing scares them. Some of them have PhDs, others are surgeons, anesthesiologists, optometrists, engineers, etc. Clearly investing can intimidate even the brightest minds. I think that the reason for this is not because people are unable to learn about it, I believe it is because no one has ever taught them. We are always intimidated when it is clear that we lack knowledge, experience or skill in a certain area, especially if others who are proficient use investment jargon or flaunt their expertise in front of our eyes.
Some parents have also told me that they grew up in an environment where their beliefs about investing were shaped based on what they saw, such as investing is for rich only or math geniuses. Many moms have even told me that they grew up thinking that investing is only for men and that only men do it.
I am here to tell you that investing is for all of us. It is not as complicated as you may think it is. Famous investor Peter Lynch said, that as long as you have completed grade 5 math, you should be able to invest.
I would like to take it further than that. If you can learn how to invest, you can also teach your child how to successfully invest. I know that this is true because I have been in your shoes, and I hope to share with you how I have successfully been teaching my kids. Hopefully this can inspire you to teach your own children how to invest and change the future trajectory of your family’s generational wealth.
I am not talking about day trading. I want to share with you the lazy, but successful way of investing. Why lazy? It’s lazy, because once you understand how it works and you set it up, you only have to periodically review your investments, rebalance your portfolio, and just stay the course. I like being a passive investor instead of an active investor. I don’t have time to do daily checks of my portfolio, market news, specific news on certain stocks, it takes too much time. Even though I am a CPA, and I have been trained to analyze companies and their financials, I am also a busy mom, who is a chef, a chauffeur, cleaner, personal assistant, etc. You get it. I do not have too much time to dedicate to investing. That is why I love this lazy, but successful way of investing.
So let’s get started. Here are four simple rules that I follow when investing and teaching my kids to invest.
Invest in ETFs and Index Funds. I absolutely love ETFs and index funds. These investment vehicles gained a lot of popularity over the last years and rightfully so. I’m going to explain why.
But first, some of you may wonder what an index fund is. Index fund is an investment product that is composed of several stocks that make up an index. Some of you may be going like huh? LOL I know! I did too, at first. Before I explain what an index fund is, I need to explain what an index is.
Have you heard of Dow Jones or S&P 500? If you are about to say “no”, just think of a TV news channel and the finance info running on the bottom of the screen. I put a picture here so you know what I am talking about.
So an index tracks the performance of a group of stocks. For example, Dow Jones tracks performance of 30 largest US companies such as Facebook, Google, etc. S&P 500 index tracks performance of 500 largest US companies. When we look at these indexes they indicate to us the direction in which the economy is going. If you see the index in green and a positive amount next to it, that means the companies are doing well. If you see them in red and a negative amount next to it, it means that they are not doing well. In a nutshell, indexes provide information on the pulse of the economy and markets for the rest of us. It’s like a quick short-cut to knowing what is going on in the world of finance. That is it. Simple. Right?
Ok. Now that you know what an index is, an index fund is an investment product that contains all companies that are part of an index. For example, if you buy an S&P 500 index fund, with your one purchase, you are investing in all 500 companies that the S&P 500 index follows. The beauty of that is immediate diversification in your investment portfolio. So instead of investing in only one stock, you are investing in 500 stocks. You are not putting all your eggs in one basket. You are diversifying your investments and your risk exposure as some of these companies may underperform in the market while others do well. You can diversify even further, by buying index funds that follow indexes other than S&P 500 or Dow Jones for industries like telecommunications, technology, health, etc.
ETFs (Exchange Traded Funds) are identical to index funds, except for two things. First, they are packaged differently, and I will explain that using gummy bears.
You can get gummy bears from a bulk food store, or you can buy them already prepackaged. When you buy an index fund, it’s like you are buying from a bulk food store. If you are buying an ETF, you are buying prepackaged gummy bears.
For example, if you only have $50 to invest, you can buy as many gummy bears from a bulk food store (index fund) as $50 will afford you. However, you can only buy as many packaged gummy bears (ETFs) depending on how much each package costs. For example, if each package costs $8, then you can only get 6 packages of gummy bears. This leaves you with $2 of uninvested money. $50 less ($8 per package x 6 packages). Having money left over may not be a good thing, because you originally intended to invest this money and have it work for you. Now you have to wait until you save up enough money to buy another package of gummy bears. That is why some people prefer to invest in index funds rather than ETFs. They can invest as much money as they specifically want.
The second difference between the ETFs and index funds is that they trade differently. For example, when you purchase an index fund, the trade is executed at the end of the day, whereas with ETFs it is executed at the time of the purchase.
I hope that was a good explanation of the difference between the ETFs and index funds. If you have any specific questions, let me know in the comments below.
Besides the benefits of instant diversification, the true benefit of owning either ETFs or index funds is that for very little money you can own a stake in some of the world’s largest companies. Currently one Amazon stock costs over $3,000 USD. Can you imagine saving money just to buy one share of Amazon? It would be easy to get discouraged and abandon saving and investing, especially for a child who is just starting to learn how to invest. Even if your child manages to save up and buy one share of Amazon, then they would only own one stock. All their eggs would be in one basket. Owning only one Amazon share would be risky in case the company does not perform well. In that case, diversification is a must and investing in other companies such as Google, Facebook, Microsoft, and so on. However, it would take a lot of money to invest in all these companies individually and build that portfolio. Instead the index funds/ETFs allow us to own these companies for very little money. They make it affordable for us to invest, which is a huge advantage. Depending on how much money one has, they can own as much or as little of an index fund. As I said before, it is like a bulk store purchase. As for the ETFs, currently one share of Vanguard S&P 500 ETF (VOO) costs $439. This is a lot more affordable than individually purchasing stocks of Amazon, and the rest of the S&P 500 companies.
Invest for the long term. When my children and I buy investments, we buy for the long term. We buy and hold, we do not sell. If you look at the chart below, it depicts the movement of S&P 500 over the past several decades.
The blue line represents the movement of the S&P 500. As you can see, the line is going up and down, but overall, it keeps going up. What does this mean? It means that if you invest money into index funds/ETFs, they will just like the economy have dips and recoveries, but overall will keep going up. Therefore, you will want to stay invested for the long term and ride out all the dips and earn money on your investment. Despite all the dips in the market over the decades, S&P 500 had a 10 - 11% average annual return. It is very difficult to get that kind of rate of return elsewhere. Therefore, investing into an index like S&P 500 maximizes your investment returns.
When it comes to investing, I teach my kids to take advantage of the dollar cost averaging and invest frequently. What is dollar cost averaging? It may sound like something complicated but it is not. Here is what you need to know. The best way to make money with investing is buying low and selling high. Simple. Right? It is a simple truth, but it is very difficult to time the markets and know when to buy low and when to sell high. No one can do that consecutively time after time. Instead the next best thing is investing using dollar cost averaging, which means that we invest money at regular frequent intervals instead of timing the markets. For example, every month I invest a certain amount of money and keep buying the same ETFs that are part of my portfolio. What this results in is the lower average purchase price of my ETFs. By doing this, I don’t have to worry about whether I have perfectly timed the market.
Here are some simple numbers and a chart to illustrate what I am talking about.
Let’s say that you want to invest into an ETF which cost around $50 per share, give or take. Sometimes it goes up and sometimes it goes down. You don’t know when is the best time to buy this ETF, so instead, you decide to invest into it each month. The first month, you buy one share for $47. The second month the price goes up and you buy one more share at $49. The following month, the share price goes down and you buy it at $48, and in the fourth month you buy it at $51. What is your average purchase price per share? Let’s calculate it.
$47 + $49 + $48 + $51 = $195
$195 / 4 = $48.75
Your average purchase price per share is $48.75. It is not as good as $47, but it is better than $51 or $49. At least you avoided the stress of figuring out how to time the market. That is the beauty of dollar cost averaging, especially if you are investing for the long term and planning to hold your investments and take advantage of the market and the economy in the long run.
The reason why I love index funds and ETFs is because of the low fees. Since these investment products copy indexes, there are no expensive management fees associated with them, which would typically be present with other investment products that have to be hand picked and managed by investment managers. These managers charge expensive investment management fees, about 2% which can work out to be thousands of dollars after decades of investing. Instead, the index fund/ETFs fees can be as low as 0 - 0.05%, which in turn saves you a lot of money that can be invested for your and your child’s future.
As you can see, investing does not need to be complicated. You do not need to be Warren Buffett (a famous investor) and hand pick stocks as long as you frequently invest in index funds and ETFs, and hold your investments for a long period of time. It is an easy and lazy way to invest, and that is why I believe that anyone can learn how to do it. I am not the only one with this belief. Even Warren Buffett recommends investing in ETFs and index funds.
You can do this and you can teach your child and change your family’s trajectory to generational wealth. I believe in you.
If you want more information on how to invest in ETFs and index funds, feel free to check out my Wealthy Kids Investment Club, which is a family membership club that teaches families how to successfully invest.
If you have any questions, please leave me a comment below. I would be happy to answer.