Investing 101

Revision 2
Leave comments/suggestions here.
Stock image of little dollars growing in a garden

Table of Contents

First thing's first

Investing may not be for you if…

You have high interest rate debts:

You don’t have an emergency fund:

*Under your mattress is fine too
Back to the top

Why should you invest?


Inflation is...
“a general increase in prices and fall in the purchasing value of money”
-google’s first result

Let's take a look at some graphs of inflation over time. First we have a long range chart, 1958 - 2017: Graph of inflation from 1958 to 2017. Inflation is all over the place early on, but is much more settled towards the end. There's a lot of crazy stuff happening up through the 80s, but more recently it's calmed down immensely.

Next, let's look at a more recent view, 2000 - 2017: Graph of inflation from 2000 to 2017. Inflation is shown to be hovering around 2%. The Fed has made it a goal to keep inflation around 2%*, and we can see that we're right about there on any given year. If your investment returns are greater then that, then your money is growing in value. If it's less, then you're losing value.

Your money can "work" for you

Back to the top

What can you invest in?

Things we'll be talking about:
Things we won't:
  • Real Estate
  • Commodities (oranges, gold, bitcoin)
  • Currency (forex)
  • P2P Lending
  • And many more!

Savings Accounts

A piggy bank.

Money Market


Bond. James Bond.


Back to the top

And now a brief intermission...

Feel free to take a bathroom break, make some coffee, walk the dog, or make a large purchase on a perfectly legitimate website .

Choosing is hard

You may be thinking to yourself,
"Self, this all sounds super complicated. I think I'll just continue to not invest my money."
If this sounds like you, then let me let you in on a little secret:
Most people don't beat the market over time either[citation].
Even the professionals! Now you may be saying,
"What are these S&P indices?"
-You, again
And that's great, but please stop interrupting me. We'll get there. This is a journey.

The Market

When people talk about "The Market" doing [well|poorly], they're generally talking about the S&P 500 or some other similar index of companies. In the example of the S&P 500, it "tracks" 500 large companies like Google, AT&T, and 3M. You can find the full listing here. With any index, the value of each component company is weighted and combined, giving a value for that index, in this case, listed as SPX.

So, if someone says that the Economy is doing poorly today as evidenced by the S&P 500 being down, say 5 percent, that means that of the companies that make up the S&P 500, more of them are doing worse than good - enough so to move the value of all of them down. Any given index being "down" or "up" doesn't reflect what the entire economy is doing, just the general movement of those companies involved. The actual formulation that describes how each company contributes to the movements of a given index is beyond the scope of this course, but if you're interested in that, the info is publicly available.

So, let's take a look at historical returns of the S&P 500

Log Scale

The S&P 500, graphed on a logarithmic scale. Shows the price differences in terms of percentages rather than absolute numbers.

Something you don't usually see when looking at stock charts is the logarithmic scaled chart. An advantage this gives you is that you are able to see percentage increases linearly (i.e. a 6% increase from 100 looks the same as a 6% increase from 100000).

Linear Scale

The S&P 500, graphed on a linear scale. You can see absolute differences, but not relative ones.

Much harder to interpret.

Next, let's look at how things turn out over time.

Best and Worst N-year periods of the S&P 500, annualized return

1 5 10 15 20 25
Best 52.56% 28.44% 21.56% 19.45% 18.38% 17.86%
Worst -43.84% -8.42% 0.65% 3.68% 5.63% 8.09%

The above table shows the best and worst 1, 5, 10, 15, 20, and 25 year periods of the S&P 500, going all the way back to 1929. To create these numbers, I used data from and the magic of spreadsheets to generate these geometric averages.

In any given year, an index like this can have massive swings. However, if you're able to ride out the storm, investing in an index like this has historically been pretty good, yielding an 8% annual return over the worst 25-year period.

* Past performance does not guarantee future results.

Other fun S&P 500 things:

Let's reiterate:

Most people and portfolio managers don't beat their target index over time.

"Okay, great. Now how do I use this?"
-You, angrily
Simple enough. You try to match those indices. With Funds.
Back to the top


Funds take some subset of investments (US Large Capital Stocks, European Junk Bonds, etc) and bundle them in a way that's easy for casual investors to trade. A bunch of people will pool their money via a broker, and that broker will buy and sell on their behalf.

Mutual and Index Funds

The two main types are Mutual Funds and Index funds, where Index funds are a subset of Mutual funds. Just like stocks, these funds will have shares that you can buy. Each of those shares will represent the basket of investments the fund contains.

Unlike normal stocks and bonds though, funds have a fee associated with holding them. This fee is called the Expense Ratio and is used to pay for any overhead associated with running the fund. The lower the overhead, the lower the fee.

A graph showing an index fund and it's index. They are very close to each other.

One of the easiest ways to lower fees is to not actively pick the underlying assets, and instead tie the fund to an index like we talked about above. Mutual Funds that do this are called Index Funds. On the image to the right, you can see an index fund that is attempting to track the S&P 500, and how closely it's able to do so. In this case, we're looking at the Vanguard Total Stock Market Index Fund.

Expense Ratios

As mentioned above, every fund will have an Expense Ratio. This is the Percentage Cost Per Year to participate in a given fund.

So, for example, if you buy into a fund that has an expense ratio of 1%, and the fund yields 3% this year, you'll have a profit of 2%. What does that mean in real money? Have a look below:

A graph with a bunch of hypothetical growths of $1000 over 40 years at a set interest rate. Lines show 8% is about 6,000 more than 7% after 40 years.

I've highlighted the 8% and 7% lines to show what you might find if you were in a fund that returned 8%, but had an expense ratio of 1%. In the above example, we're only dealing with $1000, but over a course of 40 years. If you follow the dotted lines back to the left axis, you'll see that there's a difference of roughly $6,000 in the returns lost to the expense ratio.

But enough theory, let's take a look at some real-life funds and their expense ratios.

So what do actual funds looks like?

Fidelity Index fund. Has an expense ratio of 0.035%
Fidelity 500 Index Fund (FXSIX)
A fidelity Index fund with an expense ratio of 0.035%
Fidelity mutual fund. Has an expense ratio of 1.01%
Fidelity Small Cap Discovery Fund (FSCRX)
A fidelity Mutual fund with an expense ratio of 1.01%

The above funds are real life examples that I pulled from my company's 401k plan. In order for the fund on the right (FSCRX) to compete with the left (FXSIX), it must overcome .975% of returns.

Two vanguard funds, differing only in the amount of money required on deposit, and the Expense Ratios those get you.

Further, some funds will give you better expense ratios when you deposit more money. In the above example I've listed two Vanguard funds that only differ in their minimum depost. On the left, a deposit between $3000 and $9999 will get you an expense ratio of 0.15%. On the right, a deposit over $10,000 will get you an expense ratio of 0.04%.

Buying a fund

There are two main ways to buy a fund: through a broker's own service, or on a stock exchange using Exchange Traded Funds (ETFs).

Through a broker's service

For this example, I'll use Vanguard, as I have experience with their process:

An advantage of going through the broker is that you may be able to purchase partial shares. This means that if a share costs $100, and you deposit $150, you'll get 1.5 shares, ensuring that your extra $50 is collecting more than dust.


ETFs are funds bought and sold on a normal stock exchange. For most of the funds that a broker provides, you'll be able to find the equivalend ETF on the open market.

With ETFs, you get more flexibility in buying and selling, but you don't get the total allocation that buying partial shares gets you. If you'd like more info ETFs, I'd suggest google.

Fund Diversification

By default, when you're buying a mutual or index fund, you're getting at least some diversification of companies. Depending on the fund, you may be invested in certain Sectors like healthcare or technology, certain asset types like stocks or bonds or real estate, or certain countries and regions like the US or Asia.

You can further reduce your investment risk profile by investing in funds in these differring classes. For instance, having your money in two different US stock funds is probably less diverse than having one stock and one bond fund. Having only US assets is probably more risky than having a mix of US and International assets.

So where's a good place to draw the line? As it turns out, there's some commonly suggested approaches, at least for long-term investing. These are the (manually controlled) Three-fund Portfolio and the (automagical) Blended Funds.

Three-fund Portfolio

The idea here is to divide your investments into three investment types:

  • US Stocks
  • International Stocks
  • Bonds
    • US, International, or Both

The next question is to figure out how to balance these investment types. The most common suggestion is to do so based on your age:

  • [100 - (your age)]% in Stocks
  • [100 - (half your age)]% in Stocks (what I'm doing)

So, for example if you chose the second option, if you're 30, you'd have 15% of your assets in bonds, and the remaining 85% in stocks. If you are 40, you'd have 20% of your assets in bonds.

From here, you can choose the allocation of your stocks. Below, you can see I've got about 15% of my total assets in international stocks, and the remainder in US.

An example distribution with a high percentage of stocks
An example distribution with a low percentage of stocks
My Allocations
An example three-fund distribution
Expense Ratios: 0.035%, 0.06%, 0.04% respectively

Blended Funds

Blended funds are sometimes also called "Retirement Date" or "Target Date" funds because you will choose when you want to start withdrawing money, aka your retirement year, and then forget about it until you retire. You can usually find these on your plan by looking for the numbers in the funds names. You'll typically see a bunch of funds clustered together with names like "Fidelity Freedom 2030" or "Vanguard Target Retirement 2050 Fund".

Fidelity Target Date 2020
Fidelity target date 2020 fund.
Expense Ratio: 0.6%
Fidelity Target Date 2055
Fidelity target date 2055 fund.
Expense Ratio: 0.68%

The main draw for these funds is that, over time, they automatically rebalance from riskier stocks to safer bonds. Unfortunately, since these are automatic, they tend to cost more than doing it yourself. In the example I found in my Fidelity 401K, the Blended Funds cost more than 10-times my Three-fund Portfolio.

If you don't like the idea of paying so much for your automatic rebalancing, but also don't trust the math of the Three-fund Portfolio, then you can also try to make your portfolio look like the blended fund of your choice, since they show the current allocations. You can do this by choosing index funds at the same percentages as seen in the blended fund's information page.

Robo Funds

There's another option when it comes to investing outside of your 401k, and that is the new(ish) concept of Robo Funds. Robo Funds are automated investments that can bring together the automated rebalancing of target date funds with a new magic called "Tax Loss Harvesting".

Tax Loss Harvesting
“Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or "harvesting" a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining the optimal asset allocation and expected returns.”

A look at two competing services is below:

a comparison chart between Wealthfront and Betterment. They're both pretty similar
Back to the top

Special Cases and Considerations


  • Pay taxes on withdraw
  • Choose me if you plan on using less money when you retire
  • Choose me if you think taxes will be lower when you retire
  • Pay taxes now
  • Choose me if you plan on using more money when you retire
  • Choose me if you think taxes will be higher when you retire

I chose traditional because I think I’ll be using less money when I retire

Other people suggest having money in both because you don’t know what your tax situation will be, or all-in on roth so you don’t have to worry about taxes later on.

Company Match and Limits

If your company offers a match, you should at least contribute what you need to meet that. It's free money after all!

There's a personal contribution limit of $18,000 per year, as of 2018. If you're over 50, that limit bumps up to $24,000.

Your company can match up to 2x of your maximum contribution, bringing the total possible yearly contributions up to $54,000. Talk to your manager about that.

Employee Stock Purchase Progam

Or ESPP. Also known as...


ESPP is a program some companies offer that lets you purchase shares at a discounted rate. Here's the gist of how it works:

An Example

You make 100K, and elect to contribute 15% towards ESPP. The June stock price was $70. Today is December 15, at 4PM, and the current stock price is $80

The two prices you'll be eligible to buy at are:

Because the June price is cheaper, you’ll buy at that rate.

You may then sell those 126 shares at the current price of $80

Back to the top