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The mechanics of investing

Updated: Dec 16, 2020

Ah, the ever-present influx of good financial advice, such as "You should buy into some good mutual or index funds!" You smile and nod, and conceptually agree with this insight. However, when it comes down to it, most of us don't actually know how to do that.

Long term investments via 401k and IRAs? Check! For those of us lucky enough to have employer-sponsored plans, we get lots of assistance setting up and maintaining those accounts. The contributions come directly out of our paychecks, and other than our quarterly statements and annual check-ins, we don't really have to worry about those much at all.

Short term investments through savings account? Easy enough. Savings accounts are plentiful and easy to access (though for good reason...they have terrible returns).

So where is this infamous middle ground for investments? How do you make your money work for you without having to wait until retirement to access it? Enter, the brokerage account. Keep in mind that this post is dedicated to the mechanics of investing, not necessarily the theory behind it, so let's focus on that and unpack how to make it happen:

  1. You can call up or visit any financial services company, such as Edward Jones or Charles Schwab. They could help you open an account and have a financial advisor manage it for you (for a price, of course).

  2. You can open an account online and direct the investments yourself.

  3. You can use a robo service, like Betterment, which has lower fees than a personal investor.

If you have a large sum of money you want to invest, I think it's best to let someone manage it for you (options one or maybe even three), as they can work dynamically in real time, and the benefits will outweigh the fees you are paying. If you only have a small amount to invest, I think options two or three are best so that you aren't overspending in management fees.

It doesn't take long to make any of this happen. When I finally got to the point where I was ready to devote some of my funds to the stock market, I thoroughly researched various investment companies. Ultimately, I went with Fidelity (Charles Schwab and E*Trade were close behind). Here are the steps I took to start investing, same-day:

  • I googled "open a brokerage account with Fidelity"

  • I clicked on the full list of their accounts, and chose the brokerage account (not the one under the "managed" account options)

  • I walked through their guided application process, step by step

  • Once the account was open, I connected my checking account and transferred funds into the brokerage account

  • I downloaded the app on my phone and logged in, though I could have continued through the browser if I wanted

  • Using their very simple search engine, I searched for a few individual (or "penny") stocks. Even though I understand that this is not the most lucrative way to invest, I wanted to connect my investing experience with concrete reality so that when I heard market news, I could have a direct correlation to make with how my individual stocks were performing

  • Take Zoom for example. Once I searched for Zoom, there were lots of charts and data that I could look through to see how it had performed in the past few days, months, or years. I bought a few shares of stocks that had consistent historical performances in this way

  • Then I used their "mutual fund research tool" to find good mutual funds. I put in certain filters (are we even Americans if we don't know how to use the heck out of some search filters?!) to find low cost, high return, high approval rating accounts. Unfortunately, the ones that were "top of the line" had minimum buy-ins, which ranged from $2,500-1,000,000+. Still, I was able to find plenty that were strong choices.

  • I tried to pick a variety of market categories, such as tech, health care, and so on

  • I put in the dollar amount I wanted to invest

  • I hit "buy", and by the end of the day, the orders were fulfilled

I did NOT pick all my investments the first day. It's important to buy in small amounts over a longer period of days, weeks, and months so that you are hitting the market at different times, unless you are a seasoned investor who is making a strategic decision for another reason.

Putting your money here is a risk, but it can be a calculated risk that is worth taking. Keep in mind that you should not put any money here that you will need to access within one year (some would argue that you should have it in here for up to five years before accessing; I differ from that perspective).

That's it! Pretty painless, actually. I also watched a lot of YouTube videos so that I could understand what all of the terms meant, how the markets work in general, and some basic strategies. I really think that anyone can do it. My account has performed very well; typically you want at least 10-20% annual returns.

What about you? How have you had success investing in the past? What kinds of questions do you have?

A note on taxation of brokerage accounts

Brokerage accounts are "pay-as-you-go". If you have gains during the year, you will get a 1099-B statement at the same time and in the same way that you get your W2s, student loan interest statements, etc. You will claim that on your tax return, whether or not you took any cash out of your account or not. While this may seem strange, when it comes time to pull cash out of your account, you will be glad you already paid the tax on it. A lot of my clients through my full time job as an accountant think that pulling cash out of their investment accounts is a "taxable event" and will give me confirmation of their transactions. However, as I mentioned, you have already paid along the way so you can feel free to pull the money out as you need it.

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