“And there is no greatness where there is not simplicity, goodness, and truth.”
-Leo Tolstoy, War and Peace
War and Peace is epic. Four Books (and an epilogue); over 1,000 pages; and it covers everything from war, to love, to the philosophy of life. It also starts slow. It wasn’t until around page 300 or so that I felt the story really start to pick up for the first time. (I know right, 300 pages!?) The other hard part of the book for me was the countless interweaving characters (I guess that’s why its a classic?!). Lately, I’ve been thinking that investing is a lot like War and Peace. It looks really complicated, is super intimidating to get started with, has lots of fancy names and characters, and if you do it wrong, you might just wind up wasting a lot of your time (and money).
In addition to reading War and Peace I’ve done a little reading about investing. I’m no expert, but wanted to share what I’ve found out. So I decided to do a five-part primer on investing, based on the research I’ve done. Five weeks; five posts. As I mention below in my disclaimer, these posts are not meant to be recommendations, they are informational. Please take them as a jumping off point. And if you do decide to read War and Peace good luck to you.
In Book One, today, I am going to give you an intro into the different types of accounts you can put your money in. In Book Two, my next post, I will discuss diversification and different types of asset classes. In Book Three, I will talk about different ways to actually invest in two major asset classes: stocks and bonds. In Book Four, I will walk you through what this entire thought process looks like for me. In Book Five (the epilogue) I will relate a few tips and suggestions I’ve picked up to help you along your investing journey!
Book One of War and Peace starts at a fashionably crawling pace, with Tolstoy introducing us to most of the characters of high Russian society right before the Napoleonic War (including the good Count Rostov who is horrible with money and as a result, eternally poor. Don’t be like Count Rostov). I want to start in an equally deliberate (if slothful) way here too and just introduce you to the most basic of investing characters. The types of accounts you can use, and where you can find those accounts.
First, where do you go if you want to invest. This is a question we can circle back to, because the answer depends on what type of account you want. But there are many options for this. You can go with a traditional brokerage, like Vanguard, or Fidelity, or you can go with one of the new-wave apps, like Stash and Acorn. You have to find a business to invest through, unless you plan on going to Wall Street yourself.
Second, what type of account you want. Do you want to put your money in a tax-sheltered account or a taxable account? Keep in mind as you think about this that at some point you will likely want to have both! The main determination you need to make is, is this money for retirement, or do you want to have it around to use before then?
Taxable Accounts: If you want to use your money before retirement, then you likely will need to place it in a taxable account. The downside to this type of account is in the name: any income it generates is taxable. The upside is, you can use all the money in it whenever you want!
Tax-Sheltered Accounts: If you want to use your money once you retire you can open up a type of IRA (either Roth or regular).¹ The main downside to these accounts is that you cannot use these until you reach 59.5 years old. (Roth IRAs and regular IRAs are very different, but that is the subject of a whole different blog. Here’s a link for a good rundown of those differences if you are interested now).
Once you’ve decided what type of account you want, you have to decide what types of investments you want to make!² Do you want to invests in stocks? In bonds? REITs (Real Estate Investment Trusts)?
At this point, we have to talk about risk and reward, and how the concept of diversification can help you. Basically, if the stock market crashes and all you have is stock, you are going to be in trouble. So how can you protect yourself from disaster? Check back next week to find out! And also so you can see what happens next in War and Peace, once Tolstoy finally gets bored of writing about dinner parties and delivers us into a maelstrom of love and lust.
¹ There are really many other types of tax-sheltered accounts. If you have an employer sponsored retirement account (e.g. 401(k)), or a 529 Savings Plan (for college), they are also tax-sheltered accounts. These accounts generally have specific purposes. I’m just discussing retirement based accounts here because those are the most familiar to people who are just starting out.
² In reality, the types of investments you want to make also informs which types of accounts you open up, because you would also want to put tax-inefficient investments in a tax-sheltered account. But more on that later!