how to invest in the stock market how to buy a stock

Make Your First Investment the Right Way

 

This episode is a real treat. I speak with Bobby Lee, Founder of 2minutefinance.com. His vlog is known for its short videos on personal finance which digs deeps into how to be a savvy consumer.

Recorded live on the floor of Podcast Movement, Bobby and I sat down to discuss stocks, bonds, mutual funds and what to look out for when creating your own investment portfolio.

You can listen to Bobby Lee’s podcast here.

His vlogs can be found at MoneyCrashers and 2 Minute Finance.

Don’t leave money on the table by investing the right way.

We also get into 401k’s and 403b’s and explain why you need to take full advantage of your company match.

Similar to his vlog, this is a bite-sized episode helping you understand some of the basic tools necessary for a healthy retirement.

What you’ll learn in this episode:

  • Stocks and bonds and what they represent.
  • ETF’s and how they’re different from mutual funds.
  • Why expense ratios matter when choosing funds?
  • What a fund prospectus is and why you need to read it?
  • The history of retirement plans and why we have 401k/403b’s?
  • What a company match is and why you should take advantage of it.

Don’t Forget to Add to Your Toolbox, Get Involved and Help. Here’s how:

If you enjoyed this episode, I’m sure you would enjoy reading this: How Doctors Can Grow Their Retirement Accounts Tax-Free

Join the Financial Residency Community: Don’t forget to join the Financial Residency Facebook Community for exclusive access to taking the Wealth Potential, Investor Composure and Financial Planning assessments.

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Full Transcript: Make Your First Investment the Right Way

Image of an investment clock

Ryan

Are you leaving free money on the table? No, not literally but are you? Today’s episode, we’re going to be talking all about what is a stock, what is a bond and all the general financial knowledge that you need to start investing?

Ryan

Hello and welcome to the launch week of the financial residency podcast. I’m your host, Ryan Inman, thank you so much for tuning in today. I know there’s a lot of podcasts out there and I’m really honored and appreciate you guys being here. Also before today’s show, I want to make sure to announce this important disclaimer. I’m a fee-only financial planner and a fiduciary for my clients. But let’s be honest, I don’t know you or anything about you. This show is for educational purposes only and shouldn’t be taken as legal or financial advice. Please consult your attorney, CPA or your fee-only financial planner before you take any action or make any important financial decisions.

Build a great foundation for the basics of investing.

Today we’re going to be talking with Bobby Lee over at 2minutefinance.com and he’s also got a podcast, Young and Oldish Poney. Bobby is a great guy and he had a great conversation that I’m really excited to bring to you guys. 2 Minute Finance is a blog that he founded in 2008 and it treats personal financial skills in a short two-minute video just like it sounds. As you’re going to be able to tell, we’re recording this live at the FinCon booth on the floor of the podcast movement conference. The podcast movement conference is a conference all about podcasting and connecting podcasters from all around the world and I had the opportunity to meet a lot of great people there and had an incredible time.

But while every episode isn’t recorded live, these three launch week episodes were recorded live which is why you’re going to hear a lot of background noise. I hope it’s not too distracting because this interview will give you a great foundation about the basics of investing. Understanding what a stock, a bond, a mutual fund and an ETF are. I know you guys hear a lot about those when you’re reading and trying understanding to study up on how to actually invest and what to do with your money. And one of the things we do is we do dive into talking a little bit more about 403(b)s and 401(k)s, the history behind them, why they’re important, why they’re not a scam and … As physicians, I know that you guys don’t have any formal training in finance. So I’m really hoping that this episode will help provide a real nice foundation of knowledge that will aid you in your investing journey. But before we jump into the interview, here is this week’s digestible tip.

Don’t sweat the minor movements in the market.

Ryan

Don’t sweat the minor movements in the market, understand that the long-term trend of the market is positive. The further you go out over time, the less this volatility … The day to day or month to month volatility actually matters. What matters is having a plan and letting that long-term positive trend of the markets work in your favor, not against you.

Hello and welcome to the Financial residency podcast. I’m your host, Ryan Inman. I’m excited to bring you an episode on the floor of podcast movement. Sitting here at the FinCon booth with a good friend Bobby. Bobby if you could, can you tell us a little bit about yourself?

Gain advice on navigating the complicated financial world.

Bobby

Sure. Well, I’m Bobby Lee. I run a video blog called 2 Minute Finance and you can see my most recent video actually on another website called moneycrashers.com. I teach basic personal finance skills and consumer survey in videos. 2-minute, 5-minute, 10-minute videos depending on which website you’re going to take a look at. And I also have a podcast called Young and Oldish Money which is just the same thing but in podcast form. So it’s all very interesting, if you want advice on navigating the complicated financial world and how to be a good consumer, then you can go to any one of these sites and listen to great advice from myself or in case of the podcast, my co-host as well.

Ryan

That’s awesome and thanks for introducing yourself. And I appreciate you being on the show here, taking time out during a podcast movement. I just want to talk a pretty high level and give our listeners a good financial foundation and just speaking on investments and … In the intro, I’ve done some disclosures so you don’t have to worry about that too much. But just kind of from a high level, let’s just talk what stocks and bonds are and kind of evolve the conversation down into that. If you don’t mind jumping into it and just kind of discussing…

A stock is basically a public company.

Bobby

For beginning investors, it can be really tough to really grasp investing, right? There’s always a question about what is a stock, what is a mutual fund? And there are very complicated investment vehicles out there but to keep it very simple here. A stock is basically a public company. It’s a share and a public company. You big stocks, what you’re actually doing is you’re buying shares in a public traded company. Think about anything … Brands that you buy today, Pepsi, Craft foods. They all put their company on a stock market and they dividend up the shares and as individual investors, you can go in and buy shares of that company. Those shares fluctuate in price which we’re going to talk about in just a little bit but it also entitles you to the right to vote on shareholder issues on how … some of the issues that the company faces that shareholders like you and thousands of other people can vote on because you’re in essence, part owner of the company. Now, the price of your investment goes up and down, it’s traded on a stock exchange.

So these shares are worth more, are worth less based on how the company performs, how others value the company. When they make a trade, that’s the last price. When you sell a share to somebody else and they buy it, that’s the last price the stock is at. There’s sentiment that’s involved in here as well. So at its core, what you’re doing is you’re buying an investment in a company and you’re becoming a very, very small owner of that company.

If you have a stake, you’re a shareholder.

Ryan

Yeah, very, very small. And you’re buying not only the profit for this year but you’re buying the ability for the company to have profits into the future which are coming referred to as PE ratio or price-earnings ratio. And when a company let’s say has a PE of 20, you’re looking at 20 times their forward earnings as an example.

Bobby

It’s important to kind of remember what a shareholder is, right? A shareholder is … you have a stake, you’re a stakeholder. You have a stake in that company and that is what buying a share is. So again, at its core, you are a part owner and are entitled to all the rights that come along with that. Now, they’re many other derivatives of that … Of course, that’s a more advanced topic.

Ryan

Absolutely. And so in … So this is the equity of a firm. What is a bond in relation to this? So let’s just say a corporate bond of Pepsi or Verizon or one of these.

Bobby

Sure. A bond is … What you’re doing, you’re basically buying their debt. You’re making a loan to the company. If tomorrow, let’s say Walmart puts out a corporate bond, right? They need some money and for whatever reason, they’ve decided to issue a bond. Investors will come out and they’ll buy the bond. Basically buying that certificate, giving the company the money to use and in exchange, they will get that principal back plus something additional. They’re much more complicated terms so we’re keeping it simple here. So you’re basically just buying into their debt and you’re giving them a loan. And at some point, you’re entitled that money back plus something else.

Ryan

Yes. And it’s not just companies that have debt, the federal government has debt. Those are referred to as Treasury or T bills and you can go forward from there. There’s a lot of different complicated products out there but at its core, it’s you buying a company’s debt and going to get interest on that debt over time. The bonds can fluctuate in value and there’s such thing as par value and all these things that we don’t necessarily have to just dump into but at its core … Another question I commonly get asked is, what is an ETF and what is a mutual fund and how do they really differ?

The advantage of a mutual fund is that it gives you the ability to diversify.

Shareholders meeting

Bobby

Sure. So a mutual fund is kind of the next step from stocks. Companies like Vanguard and Fidelity they create mutual funds and what it is a collection of stocks they purchase. So let’s say that you went to fidelity and you bought into a biotech mutual fund. Then that means there’s a fund with the fund manager and all they do is they take investors’ money and they buy stocks in that field of biotech. And what you’re doing is you’re going in there and you’re buying shares of the funds. So you don’t directly own the stock, you own a share of the fund that then invests in many, many companies and many, many shares of stock. And so the advantage of a mutual fund is that it gives you the ability to diversify.

So you may only have $100 and if you were to go out and buy shares in ten different mutual funds, you really don’t have enough money to make an impact to influence the outcome of your investment all that much. But collectively, you can use that leverage of your money plus tens of thousands of other investors that are out there who have all put their money into Fidelity into a biotech fund and they can go and buy all these different companies. And really share in both the profit and the loss of that basket of stocks as a whole.

Ryan

The mutual fund itself is run by another individual or a team of analysts and traders and portfolio managers. And I just want to go a little bit, one level deeper in our mutual fund real quick is when … those people need to get paid, right? And so a mutual fund, not only are they buying into a mutual fund and that you’ve got to have a transaction to initiate that, let’s say at Fidelity, say it’s $20 for the trade. That doesn’t go to pay those people’s salaries, that goes as the platform to turn around and buy the fund, the accounting and keeping track of it. The fund itself has an expense ratio and if you could just touch a little bit on an expense ratio and how that relates to a mutual fund because I feel like that term gets toast around a lot. And I know there’s a lot of good information on it but when I talk with prospects and clients over physician wealth, this is always something that comes up and I think it’s important.

Bobby

One of the biggest scrooges when it comes to mutual funds is that expense ratio. And there’s also … It could also be called management fees all right. There are other ways to describe it and there’s also loads. So when you buy into the mutual fund, there’s always different gauchos but they have to have the money to run the fund but it’s also a way to make a little bit extra profit. There is sometimes a commission to make the trade. There are folks that don’t charge, that’s a different story. There is also something called loads. So there is a front-end load and a back-end load. That means when you buy into a mutual fund, there is a front-end load. When you sell, there is a back-end load. And that just means that they take a fee and there’s also expense ratios which is an ongoing expense.

When you look at a mutual fund and they say they have an expense ratio of .85%, that is what you’re paying out of your investments, out of your … hopefully, your returns to continue to be an investor in that fund, to keep their management paid, to keep the fund going. But if you can imagine for a second, let’s say your mutual fund only returns 5% in a year and then you’re paying .85% in ongoing expense ratio and you had a front-end loader to buy into it. And let’s say you just happen to buy … This is an even more complicated layer. You buy a different class of mutual funds, so different classes means different pricing point, right? Yeah, maybe there is … Class A could have no load upfront with a higher expense ratio and class B could have a load somewhere in the back end and a lower expense. There’s always different combinations.

Mutual fund company levels can get very complicated.

So now you have these different levels and levers that the mutual fund company can pull to charge you and it can get very complicated very quickly. So this is where it’s important to look at what they call a prospectus. It’s a legal disclosure that talks about what the fund invests in, what their objective is. Often times, they will get to hear from the fund manager themselves about what their goals are. And most importantly, there’s a term sheet in there that shows you all the fees depending on the class that you bought into. And it’s all very, very important to take a look at. Often times, they are summarized online but there’s nothing better than just flipping open the book and taking a look at what exactly you’re going to be charged.

Ryan

Yeah, and not everyone is money nerds like you and I. And they see these 40, 50, 60-page books and it usually just goes into the trash.

Bobby

Right. There are so important because often times, they also accompany something called a shareholder proxy. So again, we go back to the voting thing, sometimes you have to vote on something. They want to know how you feel and they want to know how the majority of shareholders feel. So often times, there’s some sort of action you need to take along with the perspectives that you receive on annual basis. So these are things you should pay attention to, not throw away.

Ryan

Exactly, I definitely agree and I think the part that you’re talking about with the load and no load is critical. And if you work with an advisor that recommends loaded funds, you need to question it. You really do need to question it.

Bobby

Right.

Ryan

To kind of switch back into the ETF space, so how does an ETF differ? I received a question from an actual client, this is a real question from a physician. That he said, “I looked on Vanguard based on what he had talked about and Vanguard has a mutual fund and an ETF for this same thing, why would we buy a mutual fund over an ETF or why would I buy an ETF over a mutual fund?”

An exchange-traded fund is traded on an exchange.

Bobby

An exchange-traded fund mostly literally is a fund that can be traded on and exchanged on the stock exchange, right? And often times, these funds you’ll hear termed index funds, for example, those track like the S&P 500, could be the Dow Jones industrial average but in the most literal sense, an exchange-traded fund is a fund that is traded on an exchange. At the most basic level, you don’t necessarily have to have a broker … Like a retirement advisor or an investment advisor to buy into a mutual fund. You could bypass it and just send a check directly to Vanguard or directly to Fidelity. So it’s different access points and different investment vehicles.

Ryan

Absolutely and none of this is rocket science. And coming from a fee-only planner that works with physicians, my listeners along with my clients are extremely smart people, they’re physicians. They can get this stuff. It’s more … If they want to get it, if they want to take the time to learn on it and take actual advice on it. Speaking to that, you can go into Fidelity or Vanguard or any one of these brokerage houses, TD Ameritrade where I cast a yard on the institutional platform. And you can go in and buy no-load funds, you can go in and buy ETFs. A lot of this are commission free. I know that in my financial planning business, I put clients into a lot of Vanguard funds that are ETFs because they’re free. So that whole $100 they’re going to put in to get work, all of it is going to go to work. There’s no $10 trade fee here or $19 ETF … mutual fund trade.

I do want to come back to the concept of an ETF, how would one go purchase that? Is that like a stock or this that like a mutual fund when they go to purchase it?

Bobby

You could trade them if you had the symbol. You could go on to the exchange through a broker and buy into it that way because they have a symbol attached to them. So they have a symbol just like a stock would and so again going back to the most literally, they can trade them on an exchange.

Fee-only financial planning exists because clients come first.

Ryan

It’s just like any other stock that you would buy. You can go on, type in whatever the symbol is and say, “I want to buy 1 to 100 shares …” whatever it might be and easily make the transaction yourself. And so I’d like to kind of switch over to retirement. And just kind of speak on those, I literally had someone reach out to me who said, “They did not invest in their 403(b) because they thought it was a scam.” And I know that the financial industry it’s an unfortunate thing that we’ve got to have rules to tell us to be fiduciaries and to put our clients first. Thankfully, fee-only planning exists because we do put our clients first. But the education about this really needs to be out there.

Bobby

Right.

Ryan

Can you just talk a little bit about retirement plans and a little bit about them?

Bobby

Sure. Retirement plans … It helps give some context to how we got to the retirement plans that we have today. As you probably know, many of your parents, their parents’ generations passed, when they worked for a company, they got a pension. Those are called kind of these defined benefit plans, right? So you work for a company for 30 years, the company says, “I’m going to take care of you when you retire for the rest of your life.” It sounds sustainable, right? There’s no way. Just imagine over decades, someone like Alcoa Aluminum, or somebody like 3M, if they offered pensions. Over 50 years, there are tens of thousands, hundreds of thousands of employees and every single one of them has to be paid an amount of money for their retirement and that’s tough. The companies have pension liabilities in the trillions. So to kind of get away from that sort of liability which can really tank a company, we’ve moved over into these plans called 401(k), the IRAs and these are the answer to that. It’s self-directed investing or its employee sponsored investing. It puts the onus back on you to be a part of your retirement.

Benefit plans are sometimes unsustainable.

Ryan

Yeah. And originally, these were meant to compliment something. So as these divine benefit plans came down because it was unsustainable to the employer, the employer was still meant to offer something. And while this was written to come in and supplement it, it basically took the onus off the employer and said, “It’s all on the employee now. You can offer matching if you want or not.” And now, basically it’s all on the employee and it’s crazy that employees are now expected to all of a sudden have this personal financial knowledge to say, “I know what a 401(k) is now that you’ve enacted this and I know exactly that it’s in my best interests to max this out or whatever it is.” I didn’t mean to interrupt but I just wanted to make sure that … it was … that people understand that it wasn’t meant to be the only thing even though that’s what it’s really turned out to be.

Bobby

Right. If you look at it from a kind of conceptual kind of standpoint of the employer and a pension taking care of all your retirement. Now with a 401(k), they are a partner in your retirement, right? So they are going to give you a match, for every dollar put in, they’ll put in a dollar up to a certain percent. And that’s free money and that’s something that financial advisors always took about is not leave free money on the table. So your company is trying to be a partner in your retirement and take that free money. When we have a 401(k), what the company is saying, “Well, we have this plan, we want you to invest in it, we’re going to match a certain amount of money in that and then there is a menu on choices in what you can invest in.” Not everybody is skilled in investing, not everybody is skilled in figuring out how to plan for their retirement. But the employers to their credit, have tried to offer a menu to choose from of investment options.

Now on the flip side, you can look at it and say, “Well, it’s a very limiting menu of options.” And that’s also a problem. So this isn’t the solution, the 401(k) isn’t the solution but it is part of and one of the tools in your retirement toolbox to help get you true retirement and have a comfortable retirement phase or time in retirement.

Company matches is a defined benefit.

Ryan

Absolutely. And I want to just touch back up on the matching real quick. So let’s just say a company matches 3%, do you want to just quickly tell them what that actually means?

Bobby

Sure. If a company offers … If they say, “If you put in for every dollar, we’ll match 50%.” That means they’re going to put 50 cents for every dollar you put in and they may have a cap on that. Because they want to be a part of your retirement instead of having a defined benefit pension plan where they pay for all your retirement. They can say, “Well, I’m going to give you a little bit of money towards to encourage you to save for retirement.” And so what happens is that number resets every year, that amount resets every year. So they say, “I’m going to match 50% of everything you put in up to …” $5000 let’s say, that means they’re going to put up to $2500 dollars a year towards your retirement towards your retirement if you put $5000. That means if you max it out, you’d have $7500 dollars a year towards your retirement. Now if you don’t anything towards your retirement, that’s $2500 that you’re leaving on the table. That your company is just going to reabsorb and that’s money to them.

Ryan

Yeah, absolutely. And essentially what that is … let’s just kind of go with that example is if they match 50 cents on the dollar, you’re leaving a really good return on your investment. And there is nothing guaranteed in life other than if they tell you they are going to match, you put a dollar and they’re giving you 50 cents, that’s one heck of a return.

Bobby

Right. This is not to be confused with other sorts of vehicles that employers may offer. If you’re a high earner, they could have differed compensation. If you’re in a publicly traded company, they could offer employee stock purchase plans. These are one of many vehicles but the 401(k) or the equivalent if you’re a Federal government employee or a non-profit employee is important to get on board with. That is one of the primary vehicles for your retirement but it should not be the only one.

There are traditional and Roth IRAs.

Ryan

Absolutely. It’s meant to compliment and that’s been a common misconception that I’ve worked with clients is when they say, “Well, I funded my 403(b).” Which is the equivalent of a 401(k) just depends where you work, that’s a great thing except there’s a lot more that you need to do. And so I did want to touch on real quick the investment options aren’t always the best options available inside of a 401(k) and sometimes you just got to roll with the punches and say, “Hey, maybe these fees are .85% …” like we were talking and that’s a little bit high. Sometimes they’re up to 1%, sometimes your companies are amazing and they’re holding Vanguard funds at … with their big institutional share classes and it’s at .23%, it’s kind of the luck of the draw on that. But when we look at … As a 401(k) or a 403(b) is a just complimentary plan, there’s something else and that’s IRAs.

There’s a traditional and a Roth IRA. And I was wondering if you could tell people a little bit about those and maybe the distinctions between the two.

Bobby

So often times when people come into understanding IRAs, it’s because they’ve left the company. And in this day and age, folks don’t stick around in companies for a long time. They leave after a couple of years. So what happens is they end up with multiple sorts of 401(k)s at these companies. And what happens is you want to consolidate them, you want to roll them over. That’s what’s called a rollover. And you can put them into an IRA so that you have control of your retirement money.

When you leave your company, don’t cash out your 401(k), that’s the worst way you could do it. What you want to do is you want to roll over into an IRA. You want to consolidate all of them so you don’t have these different accounts floating everywhere. IRA stands for an individual retirement account. That is kind of at the basic high level what an IRA is and of course, there are different versions of it. There are versions if you’re self-employed, there are so many variations of flavors but that is one of the investment vehicles that you want to look at especially if you’ve left a company.

Depending on your income level, there are contribution limits.

Ryan

Absolutely. And one of those things that are that even if you haven’t left a company in a rollover, you can go to a Fidelity, a Vanguard, a TD Ameritrade and go open up a Roth or … depending on your income level and there are contribution limits. But with IRA, you’ll have more investment choices because it’s not tied to your employer. It doesn’t have to be opened by an employer.

Bobby

So that’s an important distinction again that we emphasize. One of the most popular things I’ve seen with 401(k)s and companies is to simplify the menu of choices. Now they’re offering something called target mutual funds. And that means you may see target 2020, target 2030, target 2040. In an effort to simplify the investment choices, Fidelity and Vanguard and these folks have offered these target funds that say, “If you aim to retire in 2030, invest in a 2030 fund. We’ll rebalance everything, we’ll buy things that will make sense as you get older towards retirement.” The problem is it’s a very programmatic approach and each of us individually isn’t one size fit all, right? And so it is easy to think about as something to go into but we’re all individuals, we all have our own different needs and desires.

And what happens is when you take your money out of the 401(k), not withdraw it but roll it over into an IRA, you’re opening up the entire investment world to you. You can invest in any stock, in any mutual fund instead of being limited by your company and what they choose.

Ryan

Absolutely. Well, I really appreciate you coming on and taking some time out of the awesome conference here at Podcast Movement sitting with me at the FinCon booth. And thank you so much again and just real quick capture where can people hear more about you and your awesome podcast.

Bobby

Yeah, you can listen to the podcast at youngandoldishmoney.com and then you can see my videos on two places, on moneycrashers.com and the number 2minutefinance.com.

Ryan

Awesome. Thank you Bobby again, I appreciate it.

Bobby

Thank you so much.

Ryan

All right. There was the interview with Bobby Lee. I hope you guys really enjoyed that episode. I know that we talked a lot and gave a lot of definitions on some of the things that you’re going to hear as you start reading more and more about personal finance and how to invest and what your retirement accounts are and all those great things. So what I’ve done actually is put together a little chichi you can download over at Financialresidency.com/003. It’s Financialresidency.com/003. And that will be a nice little chichi to help you out with some of the definitions you heard along with contribution limits and some of the other things that we had talked about.

Ryan Inman