Investing Intelligently

I know that I should be investing. I know all the basic reasons to do so, and that inflation makes my money worth less each year, and that I should try to put my money in an investment that grows faster than inflation. I know I should have a diverse portfolio. I know all that basic stuff. But when it comes to actually getting started, I’m lost. How do I actually go out and buy stocks, and what should I do to figure out which ones to buy? What about taxes--how do they work with stocks and other investments? Are there more advanced things I need to know to not just invest, but invest intelligently?

You’re wise to invest! As you point out, the reality of inflation makes investing a no-brainer. But investing is easier said that done, as you’ll need spare income to put into investment properties and will need, as you’ve discovered, to understand how the process works. Perhaps that’s why only about half of all Americans (52% in 2016) own stock.

So let’s tackle this issue: how can you buy stocks? As an individual, you’ll have to buy stocks through a broker. You can turn to a broker in person by picking up the phone or walking into an office, or you can go online and use a web broker. It’s easy to start an account and deposit cash. From there, you can buy stocks and bonds.

So what should you buy? You don’t have to know how to short a stock or how to identify a cypher pattern to do some basic investing. Exchange-traded funds (ETFs) and mutual funds are two types of investment properties that exist to make diversification easy: when you buy one, you’re effectively investing in the fund itself, which in turn is invested in many stocks at once. Online tools or a conversation with your broker make it easy to see how risky each fund is; some basic ones just track major stock indexes like the S&P 500. You can also, of course, manually manage a diverse portfolio of big “blue chip” companies, stocks in smaller companies, and bonds.

As for taxes, that depends on how you are investing. When you graduate and get a job, you will likely find that your employer offers a 401(k) program, which will allow you to invest pre-tax income and avoid capital gains tax--you will eventually pay tax on the money you withdraw, but it will taxed as income. If you’re self-employed, you can do something similar with an IRA. There are other tax-sheltered investment vehicles, too, say the attorneys at Mackay, Caswell & Callahan, New York tax attorneys for audits, tax collections, and criminal tax investigations.

Outside of tax shelters, investment income is taxed at the capital gains rate. You’ll pay that tax when you sell a stock, and you’ll pay less if you’ve held the stock for a while then if you’re flipping stocks quickly. You’ll pay taxes on how much you made--if your stock went down, of course, you can declare a loss.

“Three simple rules--pay less, diversify more, and be contrarian--will serve almost everyone well.” -- John Kay