Investing Basics Guide 2025

Introduction

Investing can seem daunting, but understanding the basics is crucial for growing your wealth. This guide will help you navigate the world of investing, from asset classes to retirement plans.

Investing Basics

1. Asset Classes Asset classes are groups of investments with similar characteristics. Here are some common ones:

• Cash: Safe and liquid, but offers low returns. Example: A savings account.
• Fixed Income: Includes CDs, money market funds, and bonds. Safer than stocks but with fixed returns. Example: A 10-year Treasury bond.
• Equity (Stocks): Ownership in a business, offering potential high returns but higher risk. Example: Buying shares of Apple Inc. (AAPL).
• Real Estate: Physical property ownership, providing rental income and potential appreciation. Example: Owning a rental property.
• Commodities: Goods like metals and energy. Example: Investing in gold or oil futures.

2. Stocks vs. Bonds

• Stocks: Equity instruments that provide ownership in a company. Higher risk and returns. Example: Buying Amazon stock (AMZN).
• Bonds: Debt instruments that promise fixed returns. Lower risk. Example: Purchasing a corporate bond from Coca-Cola.

3. Asset Allocation Determining how much of each asset class to include in your portfolio is crucial. Here are three types of portfolios:

• Income Portfolio: 70% bonds, 30% stocks. Lower risk, lower returns.
• Balanced Portfolio: 60% stocks, 40% bonds. Balanced risk and returns.
• Growth Portfolio: 80% stocks, 20% bonds. Higher risk, higher returns.

4. Asset Returns Historical returns can guide your expectations. For example, the S&P 500 had an average return of 9.5% from 2002-2021. A balanced 60/40 portfolio returned 7.4%, while a 100% bond portfolio returned 4.8%.

5. Diversification vs. the Average Investor Diversification helps reduce risk. For example, a diversified 60/40 portfolio outperformed an average investor’s frequent trading strategy by 3.8% over 20 years.

Investment Tools

1. Stock Types

• Large Cap Stocks: Companies with a market cap over $10 billion. Example: Microsoft (MSFT), Apple Inc. (AAPL), Amazon.com, Inc. (AMZN).
• Mid Cap Stocks: Companies with a market cap between $2 billion and $10 billion. Example: Zoom Video Communications, Inc. (ZM), Roku, Inc. (ROKU), Etsy, Inc. (ETSY).
• Small Cap Stocks: Companies with a market cap between $300 million and $2 billion. Example: Planet Fitness, Inc. (PLNT), Stitch Fix, Inc. (SFIX), Sunrun Inc. (RUN).
• Growth Stocks: Companies expected to grow faster than the market. Example: Tesla, Inc. (TSLA), NVIDIA Corporation (NVDA), Shopify Inc. (SHOP).
• Value Stocks: Companies that appear undervalued. Example: Johnson & Johnson (JNJ), Procter & Gamble Co. (PG), Coca-Cola Company (KO).
• International Stocks: Companies in developed economies. Example: Nestlé S.A. (NSRGY), Toyota Motor Corporation (TM), Samsung Electronics Co., Ltd. (SSNLF).
• Emerging Market Stocks: Companies in developing economies. Example: Alibaba Group Holding Limited (BABA), Tencent Holdings Limited (TCEHY), Petrobras (Petróleo Brasileiro S.A.) (PBR).

2. Fixed Income Types

• Treasury Bonds: Long-term government bonds. Example: 30-year T-bond.
• Treasury Notes: Medium-term government bonds. Example: 10-year T-note.
• Treasury Bills: Short-term government bonds. Example: 6-month T-bill.
• Corporate Bonds: Bonds issued by companies. Example: IBM corporate bond.
• Certificates of Deposit (CDs): Bank-issued fixed income. Example: 5-year CD with a 4% interest rate.

3. Mutual Funds and ETFs

• Mutual Funds: Actively managed funds pooling money from many investors. Example: Vanguard 500 Index Fund.
• ETFs: Passively managed funds traded like stocks. Example: SPDR S&P 500 ETF.

4. Target Date Funds

• Designed for retirement, these funds automatically adjust asset allocation over time. Example: Vanguard Target Retirement 2040 Fund.

5. Betterment Investing – Betterment is a robo-advisor investment platform that provides automated, goal-based investing services. It uses algorithms to manage your portfolio based on your financial goals, risk tolerance, and time horizon.

How Betterment Investing Works

1. Automated Portfolio Management – Betterment builds a diversified portfolio of ETFs (Exchange-Traded Funds) across asset classes like stocks and bonds.
2. Goal-Based Investing – Users set specific goals (e.g., retirement, emergency fund, buying a home), and Betterment tailors investments accordingly.
3. Tax Efficiency – Features like tax-loss harvesting and automatic rebalancing help minimize tax burdens and optimize returns.
4. Low Fees – Betterment charges an annual fee of 0.25% for its digital plan and 0.40% for premium accounts (which include access to financial advisors).
5. Hands-Off Approach – Ideal for passive investors who prefer automated investing rather than active trading.

Pros & Cons of Betterment

✔ Pros

• Low management fees compared to traditional advisors
• No minimum investment required for basic accounts
• Offers tax-efficient strategies
• Easy-to-use interface with goal tracking

❌ Cons

• No control over specific stock or ETF choices
• May not be ideal for active traders or DIY investors
• Higher fees than some competing robo-advisors like Wealthfront

Fund Investments

1. Retirement Plans

• 401(k): Employer-sponsored, higher contribution limits. Example: Contributing to a 401(k) with employer match.
• IRA: Individual retirement account, more investment options. Example: Opening a Roth IRA for tax-free growth.

2. Start Early Starting early can significantly increase your wealth. Example: Investing $3,000 annually from age 20 to 65 can yield 480% more than starting at age 45.

A New Chapter: Investing for Their Daughter’s Future

John and Emily, aged 47 and 40 respectively, were overjoyed when their daughter, Lily, was born on October 17, 2024. As older parents, they were determined to provide the best possible future for their newborn. They knew that financial planning and investing were crucial steps in securing Lily’s future.

Starting with the Basics

John, a software engineer, and Emily, a marketing manager, decided to educate themselves on investing. They began by understanding the different asset classes:

• Cash: They kept an emergency fund in a high-yield savings account for immediate needs.
• Fixed Income: They invested in a mix of Treasury bonds and CDs to ensure stable returns.
• Equity (Stocks): They bought shares of well-known companies like Apple (AAPL) and Microsoft (MSFT) for long-term growth.
• Real Estate: They owned a rental property that provided a steady stream of income.
• Commodities: They invested in gold to hedge against inflation.

Balancing Risk and Return

John and Emily knew that balancing risk and return was essential. They decided on a balanced portfolio with 60% stocks and 40% bonds. This mix provided a good balance between growth and stability.

Diversifying Their Investments

To diversify their portfolio, they included various types of stocks:

• Large Cap Stocks: They invested in stable companies like Amazon (AMZN) and Coca-Cola (KO).
• Mid Cap Stocks: They added growth potential with companies like Zoom (ZM) and Etsy (ETSY).
• Small Cap Stocks: They took calculated risks with companies like Planet Fitness (PLNT) and Stitch Fix (SFIX).
• International Stocks: They diversified globally with investments in Nestlé (NSRGY) and Toyota (TM).
• Emerging Market Stocks: They tapped into high-growth markets with Alibaba (BABA) and Tencent (TCEHY).

Planning for Education

John and Emily opened a 529 college savings plan for Lily. They knew that starting early would maximize the benefits of compound interest. They also contributed to their 401(k) and IRA accounts to ensure their own retirement security.

Learning and Growing

John and Emily continued to educate themselves about investing. They listened to financial podcasts, attended webinars, and consulted with a financial advisor. They understood the importance of staying informed and adapting their strategy as needed.

A Bright Future Ahead

With a solid financial plan in place, John and Emily felt confident about Lily’s future. They knew that their disciplined approach to investing would provide her with the opportunities she deserved. As they watched Lily grow, they were grateful for the knowledge and tools that helped them secure her future.

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