The following is intended to be a very general financial overview and is meant to whet the appetite of potential/beginning investors. Learning about investing in it’s simplest form is a great first step to financial independence and saving a boat-load in fees
Any investor, whether beginner or expert, will typically own two general asset classes: Stocks and Bonds. The proportional mix of stocks and bonds is known as one’s Asset Allocation. Those with less experience should keep a simple asset allocation and start off owning only two things:
- A Total Stock Market Index Fund.
- A Total Bond Market Index Fund.
To rewind a little, the first rule for beginning investors should be “Don’t own individual stocks”. Why? Owning an individual stock exposes you to “Individual or Diversifiable Risk” (the risk of price change due to the unique circumstances of a specific security
, as opposed to the total market). An investor can avoid the risk associated with individual companies (such as the CEO being involved in a scandal) by investing in a Total Stock Market Index Fund which owns thousands of individual companies (decreasing the risk of one company affecting the Fund price).