This lesson may seem very basic, but it’s an important one that I feel a lot of courses and guides skip over. This is a practical look at what exactly a stock market investment looks like form the investor side – your side. How you take money you’ve earned from your job or other means and actually invest that in the stock market.
For the most part, investment accounts are the same as checking account or a savings account. The only difference is one additional step where you select which investment or investments your money is allocated to. Let’s see how that works in practice.
[Pull up a list of banks and brokerages]
You probably recognize most of these bank names, or even use one of them yourself. These are all banks that offer a number of services with checking and savings accounts being the most common.
There’s two things you need to know about this list and most of the lists that come up when you’re looking for where to invest:
First off, most lists of places to invest, like this one from Nerdwallet, will make money from you opening an account at one of these. For that reason they’re leaving off really good recommendations.
The second thing you need to know is that these tend to favor places to invest in stocks. If you’re wanting to invest in mutual funds or ETFs, there might be better places.
The reason for this is because most people online are searching for “how to invest in stocks”, and these articles are answering that question.
What they’re not doing is pointing out an important fact: most people shouldn’t invest in stocks! These articles answer the question people are asking, but don’t help with their end goal: to make the most money in the stock market.
Most people will direct deposit their paychecks into their checking or savings account, then from there pay off their credit cards.
When it comes to investing, none of that will change. You’ll still use the same accounts you currently do for that. The one addition would be that when you want to “invest in the stock market”, you’ll either see money go straight from your paycheck to your 401k, or go to your bank account then to an investment account.
[iPad: show a diagram of JOB -> 401k / JOB -> Bank account -> Investment account]
If you have a job with a 401k, I recommend using that account for this course – at least for starters. For about 99% of people that’s the best place to start. Even for the other 1% it’s not a bad place, but there might be better ones. In a later lesson in this course, we’ll look into what other accounts might make sense besides (or in addition to) a 401k if you don’t don’t have access to one.
Side note: For a bunch of my highest earning years I didn’t have access to a 401(k). I was working at a small consulting company that didn’t offer one. Luckily there are other great options out there!
[Pull up a list of online investment accounts from NerdWallet]
These are some of the most popular online places to invest online. Some of these advertise a bunch online and through commercials, so you might recognize them, while some are less widely known.
These investment accounts can be broken down to a few different categories:
There are businesses out to make money off your investments. Fidelity, Etrade, etc.
And there are investment cooperatives that are shareholder-owned. Actually there’s only one firm like this – Vanguard. You’re going to be hearing that company name a lot during this bootcamp. It’s where I personally invest.
You can think of Vanguard like a local credit union equivalent for the stock market. They’re not trying to make money off of you. Instead, they use the income they generate to lower their fees which helps investors like you to earn more money.
[open up https://en.wikipedia.org/wiki/List_of_US_mutual_funds_by_assets_under_management ]
I’m not alone on using Vanguard either. This is the list of the largest US mutual funds by assets under management. “Assets under management” means that this much money has been invested in this fund. So for the Vanguard 500 index fund (which is the fund we talked about in the previous course) there’s a total of 157 billion. Vanguard also takes up spots 2-7 on this list with other funds they offer. That’s absolutely crazy to be honest.
This report is from 2016, so the numbers have changed quite a bit since then, but the idea is the same.
According to Morningstar, Vanguard, American Funds and Fidelity are the largest 3 companies for mutual funds, together holding about 40% market for them.
We’ll talk more later about why I personally avoid American Funds. They’re a big player in the mutual fund market, but they also charge absolutely outrageous fees for worse performance than you could have historically gotten with Vanguard.
[back to Wikipedia]
You can think of “assets under management” as votes for each of these funds. More people have “voted” for Vanguard to manage their money than any other company in the world, and that’s made it the largest provider of mutual funds in the world.
So Vanguard is both the largest investor by assets under management and also the only place to invest that’s investor-owned!
If you’re already investing somewhere else that’s not Vanguard, don’t feel like you need to stop everything and move to Vanguard. There are usually ways to get the most out of wherever you’re already investing. Just about every investment brokerages out there, and most 401k plans, offer some index funds that match up with the investing strategy we’ll be talking about: low-fee, diversified index funds.
For some accounts like 401ks, or 403bs offered by your employer, you won’t have a choice of where to invest. Your employer chooses who that’s with and you have a limited number of funds to invest in there. We’ll look into ways of getting the most out them in the later course on “how to choose the right fund”.
Ok, this is a short lesson, but here are the main takeaways:
Number 1: The places you can invest are called online brokers. You open an account there, just like you would at a bank, and transfer money to them. You can transfer money to an online broker in the same way you would between your checking accounts at different banks. Once your money is in cash with your online broker, that’s when you’d be able to buy a stock or index fund.
Number 2: Vanguard is investor-owned, rather than a profit-seeking company. This means that their fees are insanely low and they seek to keep them that way. Pick any fund at Vanguard, and you’ll see the fees associated with the fund are almost always lower than from anywhere else. We’ll be digging into fees in the next course – the pillars of investing – where we’ll see just how important fees are over time.
Number 3: The funds with the most assets under management in the world are the funds that the most people are “voting” for. This doesn’t mean that fund is the best, or that the fund will assuredly go up, but it does mean that you’re not alone in your investment or for putting your trust in this fund. A fund with a very small number of assets under management is usually a newer fund, or one that has struggled to attract people to support it.
If you were to go over to Vanguard and create an account to today, if you haven’t already, at some point you’ll be hit with how utilitarian the interface is. It’s actually gotten better lately, but it still tends to focus on doing the bare essentials – investing in index funds and tracking your wealth.
If you opened accounts at anywhere from Fidelity to Betterment, they’ll guide you through a lot more after you open your account. They might even help you feel more “safe” by showing widgets of “account progress”.
John Bogle, the founder of Vanguard, has a great quote that touches on the different style between these two online brokers:
The grim irony of investing is that we investors as a group not only don’t get what we pay for, we get precisely what we don’t pay for.
John Bogle, creator of the index fund and founder of Vanguard
Vanguard is able to offer funds at lower fees precisely because they’re offering the basics. I’d place a bet that the amount of money going to running the website is smaller for Vanguard than Fidelity.
We’re on track to make our first investment soon, but before we do that we’re going to dig into two terms we’ve talked about, mutual funds and ETFs, and see which one makes the most sense for us.
See you then.