Lesson 6: Investing Basics

Investing Basics Reference

Investment Vehicles

• Stocks: ownership shares in a company. Higher potential return, higher risk. Avg ~10%/yr historically.
• Bonds: loans to governments/corporations. Fixed interest, lower risk. Avg ~4-5%/yr.
• Index Funds: track a market index (S&P 500). Instant diversification, low fees, long-term returns.
• ETFs: exchange-traded funds; like index funds but tradeable intraday.
• Real Estate: property investment; builds equity, generates rental income.

Risk and Return

Higher potential return requires higher risk. Diversification reduces risk without sacrificing expected return. Never put all your money in one stock.

Retirement Accounts

• 401(k): employer-sponsored; contributions pre-tax; employer often matches. Contribute at least to get the full match — it's free money.
• IRA (Traditional): tax-deductible contributions; pay taxes in retirement. Limit $7,000/yr (2024).
• Roth IRA: after-tax contributions; tax-free growth and withdrawals. Best for young investors in lower tax brackets.

Key Principles

• Start early — time is the most powerful factor.
• Invest consistently — dollar-cost averaging smooths market volatility.
• Keep fees low — even 1% fee difference costs $100k+ over 30 years.
• Don't time the market — "time in market beats timing the market."
• Diversify — spread across asset classes, sectors, and geography.