The Beginner’s Guide to Investing

By Literally Broke

Illustration by Gerry Selian

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Investing is one of the most important aspects of personal finance. It’s also one of the most intimidating. So, how can you start investing, and why should you invest, anyway? Let’s cover the basics. 

What is Investing? 

In laymen's terms, you “invest” when you purchase a commodity that you can sell later for a profit. 

 Some common things people invest in include:

• Stocks - When you buy a stock, you’re essentially buying a piece of a company.  If the company does well, the stock goes up, and you can sell it for a higher price. If it does poorly, the stock goes down. 

• Bonds - When you buy a bond, you’re lending money to a corporation or the government. The goal is that you’ll recoup that money with added interest later.

• Mutual funds and ETFs- Both contain a mix of stocks and bonds. The main difference between them is that an ETF trades on the stock exchange and may have less expensive investment minimums.

Don’t worry if this is overwhelming. Financial professionals love to use phrases like these because they know most people will go, “I’m overwhelmed, just take my money and handle it.” 

That’s not what we’re going to do here. Keep reading and breathing! 

Is Investing Risky? 

If you’re a millennial who lived through The Great Recession, you may hold some not-so-factual beliefs about the risks that come with investing. I know I did! 

It may surprise you to learn, for instance, that those who panicked and pulled their investments out of the market in 2007 are the ones who lost money. Why? Because those who left the market locked in their losses, while those who stayed put and remained calm saw their portfolios rebound.

While there’s no denying that investing always presents some risk, the fact remains that there is only one way to ensure you can retire with dignity: invest. Since most of us can’t just turn on our money faucets and fill our cash bags up, investing in retirement is one of the primary ways to build wealth. 

How to Invest Safely

The good news is that there are tons of ways to mitigate your risk as an investor. 

By FAR, the easiest way to do this is through mutual funds and ETFs. They’re the bedrock of most retirement funds, and for a good reason. Warren Buffet, arguably the best investor of all time, urges people like you and me to prioritize mutual funds and ETFs over individual stock picking.

You can think about it this way: if you only invest in Starbucks stock, you’ve taken on a lot of risk. Why? Because if all their beans explode and their stock price plummets, all of your investments are down! 

But if you invest in a fictional ETF designed to encompass all the major beverage companies, you’re no longer dependent on one company doing well. Even if Starbucks stock dips, people can still drink Celcius or hard kombucha, so those stocks work to counteract your Starbucks losses.

Diversification is one of the best ways to mitigate risk. And the even better news is that we’ve designed most modern retirement plans to diversify your portfolio automatically to control for factors like industry, the age you want to retire, and more. 

So yes, while all investing has some element of risk, there are tons of ways for you to mitigate risk and enjoy all of the benefits of a well-diversified portfolio. 

If you’re looking to learn more about investing, sign up for The Epistolary, Literally Broke’s Newsletter. Each installment is curated with artists and creatives in mind.

Literally Broke does not guarantee any results from using this content and is for educational purposes only. It is your responsibility to do your own research, consult, and obtain a financial professional or other help that you may need for your situation.