.. _investments: Investment Basics ================= We talked about types of investments in the last chapter (Roth vs Traditional and 401k vs IRA). In this chapter, we will talk about the actual investments. Active vs Passive investing --------------------------- - This guide strongly advises against investing in individual stocks. To be blunt, it is unlikely that you will do better than the market average. You don't have the time, money, data, or technology to beat the market. I know you may have been looking forward to buying some stock in Apple or Coca-Cola, but that is not the best way. Fortunately, there is a very easy way to perform as well as the market average — you can buy an index fund that tracks the market. For example, if you bought some shares of an S&P 500 index fund, the fund will buy some shares of each company in the S&P 500. This type of fund is known as passive, since it puts money into some stocks and does not change them very often. The alternative is an active fund, which is regularly buying and selling new stocks. - It is quite possible that someone has tried to convince you to invest in an actively-managed fund. Multiple studies have shown that the majority of these actively managed funds cannot outperfom a passive index fund after you account for the additional expenses you will have to pay them. - It is also quite possible you have heard from your neighbor/coworker/sibling-in-law about how great they are at stock picking and about how much money they've made. You should treat that similarly to them telling you about how great they are at picking lotto numbers. It is possible that some people win in the short run, but they are unlikely to sustain it in the long term. Vanguard -------- - `Vanguard `_ is the company that is generally credited with the creation of the index fund. They are known for their industry low fees and unlike most other companies in the space, Vanguard is not a publicly-traded company. It is owned by its funds. This means that purchasing a Vanguard fund makes you an owner in Vanguard itself. - For the sake of this guide, we will generally advise to use Vanguard whenever possible. It is the gold standard of passive funds. - The easiest way to invest with Vanguard is to invest in one of their `Target retirement funds `_. You pick a fund matching up with approximately which year you will retire in and they manage the allocation of assets for you. - If you would like to do slightly more work, you should look into a `Three-fund portfolio `_. This gives you slightly lower fees and more flexibility than a target retirement fund, but it requires a bit more research on your part and rebalancing your portfolio once a year.