Investment Basics Guide

Investing can seem complicated, but the fundamentals are straightforward. This guide covers the essential concepts every investor should understand before putting money to work.

The Core Asset Classes

Stocks (Equities)

When you buy stock, you own a piece of a company. Stocks offer the highest long-term growth potential but come with the most volatility. Over long periods (20+ years), stocks have historically returned 7-10% annually after inflation.

Bonds (Fixed Income)

Bonds are loans you make to governments or corporations. They pay regular interest and return your principal at maturity. Bonds are generally less volatile than stocks but offer lower returns. They provide stability and income in a portfolio.

Cash and Cash Equivalents

This includes savings accounts, money market funds, and short-term CDs. Very safe but barely keeps up with inflation. Use for emergency funds and short-term goals.

Real Estate

Physical property or REITs (Real Estate Investment Trusts). Provides diversification, potential income, and inflation protection. Many Douglas County residents have significant real estate exposure through their homes.

Key Investment Concepts

Diversification

Don't put all your eggs in one basket. Spread investments across different asset classes, sectors, and geographies. Diversification reduces risk without necessarily reducing returns.

Asset Allocation

How you divide your portfolio among stocks, bonds, and other investments. This is the most important decision you'll make—it determines about 90% of your portfolio's variability. Your allocation should reflect your time horizon, risk tolerance, and goals.

Risk vs. Return

Higher potential returns generally require accepting more risk. There's no free lunch in investing. If someone promises high returns with no risk, they're either lying or don't understand investing.

Compound Interest

Money makes money, and the money that money makes, makes money. This is the most powerful force in investing. Start early to give your money maximum time to compound.

Investment Vehicles

Mutual Funds

Pool money from many investors to buy a diversified portfolio. Actively managed funds have a manager making decisions. Most fail to beat their benchmark after fees.

Index Funds

Track a market index (like the S&P 500) automatically. Lower fees than actively managed funds. Have consistently outperformed most active managers over time.

ETFs (Exchange-Traded Funds)

Similar to index funds but trade like stocks throughout the day. Often very low cost. Great for building diversified portfolios efficiently.

Account Types

Tax-Advantaged Retirement Accounts

• 401(k) - Employer-sponsored, often with matching contributions
• Traditional IRA - Tax deduction now, pay taxes in retirement
• Roth IRA - No deduction now, tax-free withdrawals in retirement

Taxable Brokerage Accounts

No tax advantages, but no restrictions on withdrawals. You'll pay taxes on dividends and capital gains. Good for goals before retirement or after maxing out tax-advantaged accounts.

Common Investment Mistakes to Avoid

• Trying to time the market - Nobody consistently predicts market movements
• Chasing past performance - Last year's winners often become next year's losers
• Paying high fees - A 1% annual fee can cost you hundreds of thousands over time
• Emotional investing - Selling in panic, buying in euphoria
• Lack of diversification - Too much in one stock or sector
• Waiting to invest - Time in the market beats timing the market

Simple Investment Rules

1. Start now - The best time to invest was yesterday; the second best is today
2. Keep costs low - Choose low-cost index funds when possible
3. Diversify broadly - Own hundreds or thousands of securities through index funds
4. Stay the course - Don't react to short-term market movements
5. Rebalance periodically - Return to your target allocation annually
6. Max out tax-advantaged accounts first - Get your employer match, then fund IRAs

Getting Started

The best way to start investing is simply to start. If you have a 401(k) at work, enroll and contribute at least enough to get any employer match. If not, open an IRA at a low-cost provider. Choose a target-date fund or simple three-fund portfolio. Then automate contributions and let time do the heavy lifting.