investing board

b&b 215: Back to Basics: How to Start Investing For Real, with Caleb Silver of Investopedia

In this week’s episode Brunch and Budget takes it back to the basics of investing. Dyalekt and Pamela speak with Caleb Silver, Editor in Chief and Senior Vice President of content at Investopedia, about the basics of investing and how to get started. 

Music Featured in This Episode:
Heavily Invested – Spaceman Jones and The Motherships

Leave a Legacy – Jae H.A.R featuring Ghost Black

Bull Market – GatZilla (C-Gats & Zpu-Zilla) featuring Charlie.Rose

Episode Highlights

Caleb: More than half of the country is not invested in the stock market or in the equity markets. The best day to start investing was yesterday, the second-best day is today. 

Caleb: Investing is a path to wealth that most people don’t participate in. It is one of the most stable paths to wealth. It is getting started and having a plan. 

Caleb: There is the noise around investing which you need to ignore. There is having a plan and a path to investing and having the discipline so that you are constantly adding to your investments and building your wealth over time in a way that avoids as much risk as possible. 

Caleb: People who have a disciplined approach to investing and know their risk tolerance and are not betting everything on one or two stocks, those are the people that are compounding their wealth 5-10% every year. If you do that over time and you start young you are going to love yourself as you get a little bit older.

Caleb: Investing is really an entire universe of possibilities. You need to find what galaxy within that universe you belong in and furthermore what planet within that galaxy you belong in. 

Caleb: Index investing means just buying index funds, buying the stock market, not looking at your portfolio every day and betting on the fact that it has returned somewhere between 5 and 7 % every year, not every single year but on average, for the last 50 years. You could put your money in an index fund, not worry about which stock to pick and just bet the market. Maybe I’ll do some other things in a balanced portfolio but by buying index funds or buying the market and you can buy the entire S&P 500 in an index fund, ETF, or mutual fund. That is one way to do it. 

Caleb: You would be missing out (if you only buy index funds) on diversification and alternative investments that may have interesting returns. You are missing out on the bond market, the fixed income market. The key is saying, what are my goals? You are young, you have years before retirement, but you want to build your wealth in ways that make money while you sleep. It depends on your goals and your risk management. You have to establish these things and they are all very personal to you. 

Dyalekt: Let’s talk a bit about diversification. A lot of people think that they have it figured out once they’ve gotten passed one or two stocks. Diversification isn’t one or two stocks; it isn’t ten stocks it is hundreds of thousands of stocks. When it comes to that, how should I be thinking as a beginner about diversification?  

Caleb: Typically, the rules have been, the younger you are the more stocks you should have in your portfolio; those have the fastest potential for growth over time. They are also the riskiest. If you are 20, the typical rule is you should have 100% in stocks. If you are 40 you go to 80% stock – 20% bond portfolio. As you get close to 50 you maybe want to balance that out a little more. The older you get the less risky you want to be, in general. The younger you are the more risk you are willing to take because you have the most important thing on your side, and that’s time.

Pamela: There is an emotional reaction when people hear the word, risk. What do you mean when you say risk for an investor?

Caleb: What would happen if this stock went to $0? What would that do to me, to my portfolio, to my savings, and to my plan? You never want to have one, two, or three of those stocks that can wipe you out completely, that’s risk. That is managing your risk. It is risky because we are talking about liquid securities that go up and down. But if you completely avoid it then you are also avoiding the potential for returns. You are basically robbing yourself of future gains.

Caleb: You would be in probably municipal bonds or government bonds. The US 10-year treasury is allegedly the safest investment in the world. Why? Because the US generally pays back its bills. The US 10 year is a place where people go when they are afraid of risks. So lately as the stock market has been a little bit volatile, people have poured money into the US 10-year bond. That is a place that is less risky in general. Municipal bonds, bonds that the city of New York issues for building bridges, they are going to pay that back over time by charging tolls. You as an individual investor can loan money to the state of New York to build that bridge. That bridge makes the money back from the toll, over time you get your money back. Usually it is a 10-year term or a 5-year term, so it’s less risky. 

Dyalekt: Let’s talk a little bit about Investopedia, which is an awesome resource. What is Investopedia?

Caleb: We are expert sourced. We are written, reviewed, and edited by financial experts across investing, personal finance, trading, retirement topics. We are the biggest finance and investing education site in the world and we have been around for 20 years. People that come to our sites have very high intent. You are on our site because you are looking to learn something and probably to do something. We are all things finance and investing for people who are trying to learn and then take action.

Caleb: We have thousands of people coming to us every day with questions. We take people through the basics. What is investing? What is a stock? How do you buy it? How do you assess your own risk tolerance? We have guides that take people from A-Z. 

Caleb: You could start just by reading up on Investopedia. We have a ton of content, but also a great place to start is with a financial planner of financial advisor. We are big believers in the importance of financial advice and big supporters of financial advisors and financial planners. They are gurus, they are the guides to help you set up the right plan and it’s not just about what stocks should I buy or what should I invest in; it is holistic financial planning. Investing is just one part of your financial journey, you need to do planning, you want to maybe do retirement planning. Maybe you have children that you want to set up a college fund or you want to set money aside for a big purchase.

Caleb: We also review online brokers. We are just able to launch our reviews of robo advisors: digital asset managers. Where it is very cheap to get in, you can set up an account, fund it through your bank account and you can set up an investment plan through them.

Pamela: I am a huge supporter of robo advisors. If you really don’t know where to start and you’re not quite ready to start picking your own index funds, exchange traded funds then a robo advisor will do all of that for you and charge you very little for it.

Caleb: Exactly, they will put you into a plan where they have already selected the index funds or the ETFs. Let’s say you’re a big believe in tech and where it is going but you don’t want to make a bet on a single stock. You could buy an ETF that has all of the tech stocks in a particular sector, so you are not making a bet on just one, you are making a bet on a sector. The whole key is what is your plan? What are you trying to do in life? What are your goals? Let’s put together a plan based on those things that gives you the best chance of getting there.

Dyalekt: Just being that I like an industry, or I believe in an industry doesn’t necessarily mean that it is going to do well and that it is going to be a good part of my portfolio. So how do I start separating those two ideologies?

Caleb: When companies go public to be a publicly traded stock, they have to disclose their financials. They have to disclose their business plans, their balance sheets, their plans to make money. If you are really passionate about investing in a company, it is not the worst thing in the world to do to educate yourself on the way those businesses work. What may seem like a great business, once you open the hood, may have some risk factors or losses that you were not aware of. 

Caleb: Buying a stock is basically making a bet on the future profitability of that company. Stocks are priced on a Price to Earnings ratio. Not every public company is profitable. Amazon was famously not profitable for years. Netflix, not profitable for years. And they were happy to be that way because investors believed in what they were building. Those investors that made their bet early and believed and over time have done extremely well. You want to say, “Is this a business model I can even wrap my head around”? You want to do that work yourself, so you get a good feeling for what is going on inside the business and the sector it is operating in. 

Caleb: We don’t expect everybody to be experts and I’m not an expert. I do know enough to know that I want to learn more about the way the business is run and who is running the business. When a company files to go public or is public and releases its quarterly earnings report you can look at the risk factors and sometimes you can be very surprised. You want to know what is going on inside of these businesses if you are going to put a lot of money in them. 

Caleb: Maybe you’re investing in a company you don’t really understand and maybe you should ask yourself if you should be doing that. That said, people invest in companies all the time that they don’t completely understand. The whole key is don’t put 30% of your portfolio in that stock. You should not have all of your eggs in one basket, you should not have all of your portfolio in one sector or one stock: you have to diversify. 

Caleb: Diversification simply means, what is a balanced portfolio that puts me on the best path to earning a stable return over time that allows me to grow my investments through the magic of compounding?

Dyalekt: Are there even loose numbers that we should be thinking about in terms of how large our portfolio is before we start playing around?

Caleb: Well the playing around part is the part that you need to be careful with. You want to set up a stable portfolio where you don’t have to look at it every day, you’re not going to be obsessed with the news. If you want to play around with a little fun money on the side; you want to buy some cannabis stock, some cryptocurrency, some hot tech stocks or IPOs, that’s fine with a small percent of your portfolio: 5% or less. But you have to ask yourself all the time, how will I deal if this thing fell 50%, what would that do to me? If this thing fell to 0% what would that do to me? If the answer is, this could wipe me out or take me off of my plan for a while, then you shouldn’t be in there. 

Caleb: The thing that a great financial planner will tell you or a good robo advisor will help you set up is that automatic saving. You have to make that automatic and then you can reward yourself, once you’ve already taken care of business.

Caleb: ETFs are not just for stocks. ETFs could have bonds in them, ETFs could have gold in them, ETFs could have real estate in them. You can invest in alternative investments in ways that you invest in stocks or in ways that you may be more comfortable with because they are packaged through exchange traded funds or other index funds right now.

Caleb: Investing in gold does not mean having bars of gold tucked away underneath your bed. Gold as a collectible is one thing. Gold the commodity or investing in an ETF or an index fund that has gold in it is different than actually taking possession of the gold. Governments take possession of the physical commodity. As an investor you don’t need to do that. You can if you want it as a collectible, that is one way of doing it. When we are talking about investing in gold we are talking about buying it as a security.

Caleb: I think having some alternative investments in your portfolio is a good way to get diversified. Alternatives are an important part of the investing universe because of diversification. It is not just about stocks, bonds, and commodities. It is about other assets that you can invest in. They are an important way to diversify your portfolio but the track record for stocks and bonds is a little bit easier to wrap your mind around it. 

Dyalekt: REITs, or real estate investment trusts, have been really popular. There have been fake ones and people who have are fraudulent about their accounting. That one seems a little bit harder to vet, at least for someone who is just starting out. What should I be looking for?

Caleb: You want to look for the management team, who is actually running this REIT? What’s their track record? What else do they own? What does the REIT actually have inside of it? Is it apartment buildings in college towns that are growing in popularity, where a lot of people are moving? That’s reasonable, I can get behind that. If its REITs in let say, shopping malls, and we all know what’s happening to shopping malls across the country, you might want to think twice about that. If its REITs that have properties outside of the US that have a little bit different rules or less stringent rules on disclosure, you might not want to get into that. What you want to do is be invested or look into the things that you can understand.

Pamela: I will say if there is anything that you don’t understand, we have used Investopedia for many of our investment appetizers. I still use it today as a financial planner when I run across jargon I don’t understand. There are videos, easy definitions. There’s great real-world examples and things like that. If you don’t know where to go for investing, this is a great place to start.

Caleb: Come any time, it’s free. We are here to share the knowledge. If you see anything that you think is missing from the site or want to add something to it, you can always hit me up. I am easy to find on About Us section of Investopedia.

Caleb: We rolled out a couple things in the last two or so years. We have an online video academy if you want to take investing classes or learn how to trade. You can take one of our online video courses. We have been reviewing the online brokers and robo advisors because they are gaining in popularity. Soon we are going to drop our robo advisor reviews. Editorially based, we actually user tested all of them. We’ve determined what we think are the best ones and the best ones for investors at all levels.

Caleb: Check our reviews. Check out our courses online. Check out the regular content that we do. We have some newsletters too. I write one every day in the afternoon, Market Sum. It comes to your inbox at 5:30. Or in the morning we have News to You to set you up for the day. There’s plenty of content and you are welcome to it, have at it.

Dyalekt: My favorite thing that you said this whole time was talking about making sure your money can make some money while you sleep. What are 3-5 steps or things that I should know so that I can sleep easy when I start investing.

Caleb: Knowing what your risk tolerance is. Building a diversified portfolio. Adding to it over time by dollar cost averaging, a little bit every month. Rebalancing every year so that you’re not too heavily weighted one way or the other. And don’t look at it and pay attention to the news all the time because that is only going to make you nuts. Enjoy the magic carpet ride of compound annual growth, there’s nothing quite like it.