Class #3 Notes: Investing 101 – The Basics

We’re back for the third week of our five week back-to-school personal finance program, which means we’re over half way. This week, we explored the basics of investing.

Our SoFi survey1 found that just over one third (34%) of consumers need help understanding investing and the stock market, and 42% aim to make more money by investing in the next five years. So, we wanted to provide you with tips and insights on how you can align your goals with your investment approach, while developing a strategy that can help you stay the course during volatile markets, and focus on the most important aspects of your long-term strategy. Here’s what we tackled:

Identify behaviors that impact investing
Before you get invested, it’s important to be aware of some natural tendencies that impact investing and decision making. These behavioral biases contribute to the average investor significantly underperforming worse than the stock market. Every person is unique, but some common biases that impact investing behavior are: loss aversion, hindsight bias, confirmation bias, and reference bias. We discussed the basics of these biases along with some examples to help you identify when they might impact your decision making.

Understand the basics of investing
Now that we understand how to identify the behaviors that impact investing, it’s time to immerse ourselves and understand the basics of investing. Before putting more money into investing, it’s recommended to have an appropriately sized emergency fund, and to handle “bad” debt, like high-interest credit cards and personal loans.

With these under control, it’s time to start talking investments with these common investment vehicles:

Cash: Whether it’s in a wallet or bank account, cash money means something. It’s liquid, which means a person can get to it whenever they need to, and is not subject to the fluctuations of the stock market. Unfortunately, that also means returns are lower over the long-term, otherwise known as inflation risk.

Bonds: Bonds are loans that can be bought or sold. Each bond represents a promise by the issuer to pay a certain amount of interest and repay the full amount of the loan on a specific date in the future.

Stocks: Stocks represent ownership in a corporation. Each share of stock represents a small share in the company. The stocks you can buy are in public companies, who have registered their stock with the SEC. Privately held corporations also have stock, but it may not be sold to the public.

Mutual Funds: Mutual funds are collections of investments that trade as a single security. Think of them as a suitcase full of securities: stocks, bonds, gold, or almost any other legal investment. They can be actively managed or passively invested. The main benefit of a mutual fund is diversification. You can buy shares of one fund and own a tiny amount of many, many individual stocks and/or bonds.

ETFs: ETFs, or exchange-traded funds, are conceptually similar to mutual funds. However, rather than being professionally managed by human beings, most are built to track pre-existing collections of assets, like stocks from a particular industry or companies listed in a specific index like the S&P 500.

Determine habits to adopt
In order to determine habits to adopt, you need to first decide if investing is right for you. In our course, we went over eight steps that help us determine this decision: Building a Safety Net, Getting Matched, Protecting Your Income, Attacking Bad Debt, Building an Emergency Fund, Saving 15% for Retirement, Saving for Other Goals, and Paying Down Good Debt.

Once you’ve determined if investing is right for you, you then need to understand what you’re investing for. I recommend breaking this down into three buckets:

•  Short Term Goal, 0-3 years: Saving in the short term to pay for things like a wedding, a down payment on home, or tuition means taking on little to no risk. That means keeping the investment liquid with cash or short term bonds.

•  Mid Term Goal, 3-7 years: With a medium term goal, investors can put money into the market(think brokerage accounts) with a mix of bonds and stocks. Even if the investment suffers a downturn, it’s possible to bounce back from it within the timeline. The key here is to take the amount of risk you are comfortable with, understanding your goal is far enough away that you may want some growth but close enough that you may want to limit volatility.

•  Long Term Goal, 7+ years: Long term investments can go onto taxable investment accounts, qualified retirement accounts, as well as stocks and bonds. This long term investment can be earmarked towards retirement or wealth generation. These long term investments can take a higher amount of risk, as they won’t be used for years. Again, your comfort with risk comes into play here because even though you won’t be touching it for some time doesn’t mean that seeing your balance going up and down will not impact you.

Now that you have a solid understanding of the basics of investing, and the various habits to adopt, you can take your education further and check out the SoFi Guide to Investing Intelligently. This guide will give you additional information to help you get started.

See you again next week for our class on Wednesday, September 30 at 12pm PT/3pm ET with my colleague Lauren Anastasio, CFP® at SoFi, where you’ll learn the knowledge and tools you need in order to make home ownership a reality. And remember, if you want to learn more on investing, SoFi members can schedule a session with any of our SoFi Financial Planners here.

We appreciate you joining us this week and we look forward to seeing you again!

1Survey conducted via SurveyMonkey of 1,230 people ages 18 to 74 during August 19, 2020 to August 20, 2020.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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ABOUT Brian Walsh Brian leads the financial planning team at SoFi and is a CERTIFIED FINANCIAL PLANNER™ professional. As a self-proclaimed financial planning nerd, he leverages research, member feedback, and past experience to deliver advice that is both meaningful and practical.

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