Fear of investing: Divide(nd) and conquer!

I've read hundreds of books, articles, and blog posts about money. I save. I like to pay cash. I avoid consumer debt. I know how to make more money.

Sounds good, right? Well, I have a skeleton in my closet: I am afraid of investing. And 2013 is my year to conquer it (or at least subdue it a little).

At first glance, you may not believe me. After all, I started contributing to a 401(k) when I was 21, getting the maximum employer match. Since then, I've always contributed enough to get the employer match and sometimes more. In addition to my company-sponsored retirement accounts, I have my own personal Roth IRA that I contribute a small amount to each month.

Why then this fear of investing?

Compounded fears

Fear causes all sorts of dismal things, not the least of which may be missing out on compound interest and decreasing the timeframe in which to invest. Do we share any fears of investing?

  1. Losing money. I am not afraid of losing money…now. I mean, I would rather not, but I can overlook a short-term loss for a long-term gain. But plenty of people, like my husband, are. Instead of embracing some risk, some people want to leave their money is very safe accounts – accounts that don't keep up with inflation, so the money is lost after all.
  2. I can't save enough money, so why try at all? No one wants to spend their retirement worrying about money. Still, the long-term goal, the amount of money required, and the current financial responsibilities of today make it difficult to get past this fear.
  3. Making the wrong decision. This is my greatest fear: What if I decide to invest in this and only get an 8% return on my money when I could have invested in that for a 10% return? A 2% difference over 40 years is HUGE. How would that affect my children and grandchildren?
  4. It's too hard/I'm not smart enough. Oh, yeah. This, too. I prefer wading through ways to earn more money or cutting expenses to deciphering methods of investing. Real estate? Stocks? Gold? Mutual funds? Index funds? Ugh. And what about all those terms? Dividends, small-cap, growth vs. income, mutual funds, and ETFs. It's enough to make me go make homemade laundry detergent and forget this investing stuff. But that Robert Brokamp is one smart dude. I hope you're reading his stuff. He's smart and funny.

Investing for the future

The best way for me to be mobilized (instead of paralyzed) by my fear is to analyze my goals: Why do I really want to invest? I've mentioned retirement, but that's not why I want to learn more about investing. Though we're just in our early 30s now, our goals will change. But right now, we intend to live in our current home until we can't take care of it anymore. Since our goal is to pay it off in five years, we'll have decades without a mortgage. We won't be buying a vacation home or taking exotic trips. We have a small amount of acreage, so we can grow our vegetables and raise our own animals. Obviously, I don't know the future but it seems like our current savings rates will be more than enough to cover our retirement needs. So why worry about getting an 8% rate of return instead of a 10% return again?

A big retirement nest egg and foreign beaches are not why 2013 is my year to learn about investing. No, I have another dream, and it's called choices.

This isn't something new. Over the last three years, we've been preparing for a drop in income, so when a few opportunities presented themselves, we could say, “YES!” without worrying about how we would pay the bills. January 1, my husband started his dream job. His 2013 income will be just 60% of what he made in 2012. Because we've practiced living below our means, we feel (kind of) ready to live on less.

This experience showed me that, when our income exceeds our expenses, we're not a slave to a paycheck anymore. We can say “yes” when we want to and “no” when we feel like it.

While we're getting there, we aren't there yet. Take me, for instance. I have this business idea. I think it's a good one. You know, low overhead, high barrier to entry, recurring revenue, and internet-based. But I don't have time right now to focus on it. I don't have the time, because I am trading my time for money.

And this, this, is why I need to conquer my investing fear. If we had significant monthly investment income, I would no longer have to trade my time for money, and I could start my business. If I no longer had to trade my time for money, I could choose to spend even more time with my family. I could choose how to spend my time. Period.

Yes, investing for the short-term is something that I've ignored, for all the reasons mentioned above. But now that I've gotten a taste of freedom, I want more. If I really want more choices, I have to learn about investing.

The investing plan for 2013

So, my husband and I created an investing plan. Throughout the year, I'll share posts occasionally about how I am learning more about investing and what I'm doing about it. I imagine that my experiences will be too elementary for many of you (if that's you, Brokamp's posts are so good), but I will share as much as possible to help those of you who feel, like me, that Investing 101 is still too hard.

I hope my investing homework will pay me in big dividends. (You knew that was coming, didn't you?)

If you have a fear of investing, how have you overcome it?

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Mrs PoP @ Planting Our Pennies
Mrs PoP @ Planting Our Pennies
7 years ago

I think a big part of it for me is having a partner who fills in the gaps of my own financial tendencies. If I were alone, I might have stuffed money into 401Ks and IRAs, and then after that chosen safe investments like CDs. But Mr. PoP gets all sorts of ideas – some riskier than others, and challenges me to think of ways that we can take our time out of the money making equation. Then my cautious, numbers-oriented self gets involved and makes real cash flow, and worst-case scenario type of predictions to estimate the risks and… Read more »

Elizabeth
Elizabeth
7 years ago

My parents are the same way 🙂 It’s worked out well for them in the long run! I hope I can find more balance on my own.

AMW
AMW
7 years ago

We just started seriously investing last year with similar differences (only I am the risk taker and he is not). We decided to turn it into a competition/experiment. For 3 years we each get 1/2 to invest and see who fares better. Nothing crazy or anything like that…so far I am a little bit ahead :).

Andrew @ Listen Money Matters
Andrew @ Listen Money Matters
7 years ago

Yea so I guess I was never afraid because I have the opposite problem. I’m brash with risk, I would sooner go for 4% more return with 10% more risk.

Why don’t you try index funds, they consists rely perform and even beat more than half the money managers out there. Or Vanguard funds with 0.20% fees?

Elizabeth
Elizabeth
7 years ago

I’m looking forward to more posts on this topic! I’m in a similar position (minus the family) — doing most things right, but with a gap when it comes to investing. Right now trying to figure out whether to hold the investments under my RRSP of TFSA is the big question…

Jacq
Jacq
7 years ago
Reply to  Elizabeth

Elizabeth, I suggest you check out the blog Million Dollar Journey to research Canadian-specific TFSA vs. RRSP questions.

Elizabeth
Elizabeth
7 years ago
Reply to  Jacq

Thanks for the suggestion! I’m compiling a list in my RSS reader. It’s time to think beyond mutual funds — I’m just trying to figure out the tax implications of various vehicles.

M
M
7 years ago
Reply to  Elizabeth

For we Canucks here, there’s an additional wrinkle. While most folks advise a TFSA for those with a DB pension or who are lower income, TFSAs are not recognized by the IRS (this is for those who are dual US-Canadian citizens) and are considered a foreign investment. RRSPs fall under a tax treaty with the US and remain tax-deferred. Trust me–this is a BIG deal. IF you are earning 40K/yr or are a dual citizen, go with RRSPs.

Jacq
Jacq
7 years ago

I got my 12 year old interested in investing by buying him stock but he got more interested when it was a dividend paying stock. One way for newbies to get excited about it is to see how every increment saved pays for one of your expenses – like the cross-over point in YMOYL (originally written back when you could make 15% in a CD). I still do that sometimes in my head – buying this investment for $10,000 at 6% pays out $50 each and every month which pays for half the electricity bill or whatever. Other than that,… Read more »

Jacq
Jacq
7 years ago
Reply to  Lisa Aberle

Yes, index funds don’t give you that clarity of what you’re getting. I suppose you could use an estimated return of x% (who knows what that will be) – whereas with a dividend it is what it is. Well, except that it can be cut. 🙂

I’m partial to dividends though – I call it my “paycheque for doing nothing.”

Sandi_k
Sandi_k
7 years ago
Reply to  Jacq

There are mutual funds that invest in dividend-producing stocks. Such as the Vanguard High Dividend Yield Index fund – VHDYX.

Jacq
Jacq
7 years ago
Reply to  Jacq

Sandy, I’ve owned them. The ones I had rolled the dividends back into the fund. My bond funds paid out the dividends they accrued as well. I know it’s only psychological but I get the warm and fuzzies seeing the $ show up in my account – besides the fact that I’m trying to live off of dividends and not touch principal.

Cat
Cat
7 years ago

Congrats on your husband starting his dream job!

I am scared of investing too… I’m scared to lose and I know I can’t invest without having a solid emergency fund and some other things, so it worries me. I’ll be looking forward to hearing how you did.

Ross Williams
Ross Williams
7 years ago

I think you need to make a distinction between saving and investing. You are right on the money with #4, you aren’t smart enough to be an investor. That doesn’t mean you shouldn’t save money or that the money you save shouldn’t be invested in stock. It means you should simply buy an index fund with low fees, Vanguard suggested above is a good example, and leave your savings there. Let the market make the investment decisions for you. You need to accept that your index fund holdings will lose value some days, months, years and realize that is irrelevant… Read more »

DreamChaser57
DreamChaser57
7 years ago
Reply to  Ross Williams

I wholeheartedly disagree with the contention that she is not smart enough to be an investor. In fact, I find that comment elitist and oft-putting. It colors the rest of your comment which actually had useful advice. Anybody who is smart enough to make money can be an investor. Sharebuilder which permits people to make fractional investments is very user-friendly and has ripped the veil off of investing. Someone can invest $50 in Google whereas one single stock hovers around $400-$500. You can even have automatic deductions from your checking account I know relatively little about investing. Hubby and I… Read more »

Ross Williams
Ross Williams
7 years ago
Reply to  DreamChaser57

“In fact, I find that comment elitist and oft-putting.”

Nonetheless it is true of all of us. Actual investing requires a lot more than picking a few stocks of familiar companies.

Every time you buy a stock, someone else is selling. And every time you sell a stock, someone else is buying. Given the concentration of control over capital, its a pretty good bet both the buyer and seller are professionals who know more about the company’s prospects than you do. Your chances of buying high and/or selling low are pretty good. That isn’t the way to make money.

Ross Williams
Ross Williams
7 years ago
Reply to  Ross Williams

Lisa,

I bought Quaker Oats stock with the proceeds of my paper route when I was about 13. I lost money, but it was fun to follow the stock and I did for a long time even after I had sold it.

I think you should just keep in mind the difference between the learning/education/entertainment value and the purpose for which you are saving. I think the savings goal will be more securely achieved through broad index funds that match the market rather than individual stock purchases.

Megan
Megan
7 years ago
Reply to  DreamChaser57

I LOVE ShareBuilder! It made the idea of investing a LOT less scary. The tools they have to help you select a stock or fund are very helpful, and I love that you can buy partial stocks. Sadly I recently closed my account with them because my husband and I made a joint account, but I would highly recommend them to new investors.

Ivy
Ivy
7 years ago

I highly recommend browsing the Bogleheads forum a bit, especially the “Investing – help with personal investment” section – there are very knowledgeable people who are ready to help with advice. If you want to go with index funds you’ll find it very useful. There is also a wiki on basic subjects, recommended books, etc http://www.bogleheads.org/forum/index.php I started investing outside of 401k only last year and because for professional reasons I pretty much can’t invest in stocks, index funds are a terrific, low cost diversified alternative. I visit the forum often and while I don’t always fully agree with the… Read more »

M
M
7 years ago

Lisa,

I believe you ARE smart enough as evidence by your caution around the stock market. There is much out of investors’ control there. I fussed with this idea myself but living in Canada we face much larger MERs and rather limited access to Vanguard funds. So I’ve become a boring bond-girl instead and invested in rental property to actively grow my assets. But I second what others have said about the prudence of index funds. Good luck!

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
7 years ago
Reply to  M

Warren Buffett has always said that if your IQ is over 125, donate the extra points to charity because you don’t need them as an investor.

I don’t think being smart in the conventional sense has much to do with being a successful investor. It has more to do with controlling your emotions and checking your ego at the door. Benjamin Graham’s famous book, The Intelligent Investor explains this really well.

Peach
Peach
7 years ago

I agree, especially about emotions. I left my Vanguard funds and few shares of stock alone thru some downturns in the market a few years ago, and they regained their value and more. It was hard not to cash in like many others who started to panic when the market fell. Reacting emotionally would have cost me a lot.

Phoebe @ http://allyouneedisenough.blogspot.com/
Phoebe @ http://allyouneedisenough.blogspot.com/
7 years ago

I was also afraid of investing for a very long time and saw it as a type of gambling. But what clicked for me was learning about dollar cost averaging, taking timing out of it. I had been regularly contributing to my 401K and was comfortable with that, so we simply repeated that with index funds, and slowly we have been increasing the size of our conrtibutions over time.

My advice to anyone would be to just jump in with small monthly conributions.

Kelly@Financial-Lessons
7 years ago

I think practicing living beneath your means so you have choices is a great idea. If you are afraid of investing or are not the kind of person to take “risks” when it comes to money, its a good idea to save up some amount that you can then experiment with in terms of taking a risk. Why not test the waters and see what it could do for you.

Some Guy
Some Guy
7 years ago

You’ll probably get a lot of suggestions on what to do. Read through everyone’s suggestions and find the ones that work for you. My suggestions aren’t going to work for some people, while others will agree with many of them. Pick the things that work for you. Now to my actual suggestions: I disagree about you being “not smart enough” to understand investing. You sound like you certainly need to learn a bit, but that isn’t the same as not being smart. Just under-educated. This is OK. I work with computers and understand them, but I won’t even attempt to… Read more »

M
M
7 years ago
Reply to  Some Guy

@Someguy
Very helpful and wise advice!

Brett @ wstreetstocks
Brett @ wstreetstocks
7 years ago

Many people avoid investing simply out of the fear of loss. Stocks have outperformed every asset class in the last few decades.

Mom of five
Mom of five
7 years ago

Hurray! I’m so looking forward to your future posts. Other than retirement funds, I’m also an investment novice. I find I get more bold as I have more invested. I started by investing a little bit here and a little bit there. I figured $500 at a time was about all I could mentally handle losing so that’s what I did. As I began receiving dividends and tracking my stocks on a daily basis, I have gained confidence and I now have plans to put $2000 into a stock once it drops to my predetermined low. I hope this is… Read more »

Mike @Personal Finance Beat
Mike @Personal Finance Beat
7 years ago

I think #4 is a big obstacle for a lot of people — they just don’t know what they’re doing, which is understandable, with all the overwhelming information out there. I consider myself pretty financially-literate and yet I don’t dare try to play with the day traders, buying and selling new stocks every day. I think there are two good ways to go about investing for “every day” folks. 1. Dividend investing. Pick 12 blue chip stocks that pay a nice dividend (2.5% or better) and just dollar-cost average invest in them once a month. (I currently own Altria, JNJ,… Read more »

Darth Yoda
Darth Yoda
7 years ago

Saying that an investment class is “gambling” just because you dont understand it is a wrong attitude to begin with. Real estate was considered the safest bet until the crash. Investing in a bubble on the other hand is always a gamble no matter how “conservative” or “safe” the underlying asset may seem. It can also never be stressed enough that using leverage is always a high risk proposition akin to gambling (again note that any house purchased on credit is a gamble that can wipe out your equity, as many have found out). Just going out your door is… Read more »

Ross Williams
Ross Williams
7 years ago
Reply to  Darth Yoda

Speculating in real estate was never considered a “safe investment” by anyone except those who didn’t understand it. The ratings agencies considered mortgage backed securities safe. In part because they had mortgages across multiple markets and we had never had a nationwide real estate crash. In part, because their customers were making a lot of money creating those bonds based on their AAA ratings. But even the folks writing those mortgage backed securities were shorting them. A better example is GM, which was considered a rock solid retirement investment. People bought the stock and lived off the dividends. Safe as,… Read more »

William @ Drop Dead Money
William @ Drop Dead Money
7 years ago

Congratulations, Lisa! Successful investing starts with a decision to do it. Personally, I believe anyone who can buy a house, a car or clothes can invest. The financial services industry WANTS us to believe we’re idiots… so they can make money off us. Investing is like any other endeavor: you start, and you learn more as you go. Not every investment will be the jackpot, and not every investment will be a loser. But here’s the good thing: the longer you do it, the better you get at it. And it’s the end that matters a whole lot more than… Read more »

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
7 years ago

Great article Lisa! In contributing to retirement accounts so early, it seems as though you’re not really that much of a beginner 🙂 I’m looking forward to your subsequent posts on this topic. If you’re not afraid of losing money, then you probably shouldn’t be investing in the first place. A good healthy fear of loss is probably the most important trait to have as an investor. Only invest money that you’re willing to lose. Diversify: pick some mutual funds, but also buy some common stocks on your own to keep yourself interested. It’s easy to get excited about investing… Read more »

mike
mike
7 years ago

I personally wonder what the stock market would be like if the Fed had not injected trillions of dollars of liquidity into the economy through QE infinity. I feel that that markets in general are fundamentally rigged right now in order to make people take risks with their money, maybe you would have been happy with a 5% cd a couple years ago whereas now that is not now possible due to the easing. Of course the window on this easing will eventually close, and when people can earn decent interest rates in a safer vehicle we will see. I… Read more »

mike
mike
7 years ago
Reply to  mike
Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
7 years ago
Reply to  mike

I wish I could “Like” this 100 times Mike. Artificial injections of capital by the Fed or any central bank merely distort the market and cause investors to make bad decisions that they otherwise wouldn’t have made. It’s inevitably and painfully corrected by market forces.

I personally am more worried about return of my capital vs. return on my capital.: Kyle Bass agrees with you.

Ramblin' Ma'am
Ramblin' Ma'am
7 years ago

For me, it’s not so much a fear of investing. It’s just hard for me to imagine a time when I’ll actually have money to invest. Right now, I am working on building my emergency fund to an amount I am comfortable with. Once that is done, my next step is to begin saving for a down payment. I have a pretty modest income and live in a high COL area. 20% down even on a modest condo is likely to be in the area of $30-40K. Because I’m not willing to completely abandon my “wants” in favor of savings,… Read more »

Ramblin' Ma'am
Ramblin' Ma'am
7 years ago
Reply to  Lisa Aberle

Thanks, Lisa. I look forward to reading the follow-up.

Right now I’m contributing 7% to retirement. My company matches an additional 4%, and also deposits a yearly bonus equal to 3% of my salary. But my goal is to increase my savings every year.

StFish
StFish
7 years ago

This article is so timely for me because I, too, want to start investing in 2013 but have many of the same fears. Currently I’ve been exploring Betterment.com as it seems to be a good place for those of us who are not very knowledgeable about investing. Has anyone had any experience with Betterment? I’d be interested in hearing any reviews.

Kayro
Kayro
7 years ago

Good article – kudos to the author for turning this painful period into valuable learning opportunities that she can even be grateful for, instead of wallowing in the victim role. I do have to disagree with item 9 – “Don’t quit your job without a plan.” I used to believe this, but then I got stuck in a soul-destroying position. I worked for months to try to find another job, but there was so much negative in me from my current position that I couldn’t create anything new. I finally just quit. It was terrifying, but it was wonderful. I… Read more »

Edward
Edward
7 years ago

Good post, Lisa! As many of us have, you could get burned once or twice until you find something you’re personally comfortable with. I pulled out of equities a few years ago, just before the 2008 crash, and moved everything to bonds. They’ve served me very well in the last 4 years–but I don’t see increase that as indefinite (especially now that everyone else moved into bonds), so last year I started spreading it all out into the “couch potato” strategy. I think I can live with the modest returns it provides. …And I don’t have to think/worry about it.… Read more »

Brooklyn Money
Brooklyn Money
7 years ago

I am working with a financial adviser at Learnvest, which is a service tailored to women and especially those just getting started on investing.

Ross Williams
Ross Williams
7 years ago

Lisa, you say you ares looking for “choices”. This means you have an indefinite investment horizon when you might want to make a choice. You might have an opportunity next week where you want to use that money. That would argue for conservative investment choices. But your goal of having choices also means that the “choices” you have available will depend on your investment returns. That is to say, your goal for the money may follow from your investment success. That allows you to take a lot of risk if you choose. If you win, you have a lot of… Read more »

Cat
Cat
7 years ago

@dreamchaser57 I may be wrong but for mutual funds many of them on ShareBuilder had minimums last time I looked of about 1,000 for an initial investment.

I haven’t quite figured out how to navigate the website in its entirety and have only bought a few stocks here and there to start to learn but I’d love to get some mutual funds…

Mike @Personal Finance Beat
Mike @Personal Finance Beat
7 years ago
Reply to  Cat

I use ShareBuilder and you’re right, there usually is a minimum amount you have to invest with mutual funds. What I like about their site, though, is the “automatic investing” plan. You can invest in up to 12 stocks per month, for however much you want, and they will only charge you $12. The only catch is that the date of your trades is pre-planned — i.e., the 1st Tuesday of the month. If you are dollar-cost-averaging, though, it’s not really a big deal. I like being able to buy 12 stocks every month for $12 and think it’s a… Read more »

Carla
Carla
7 years ago

I’m afraid of losing money. I’ve lost money in the past and can’t afford to lose more.

I work part-time and live on disability. There really isn’t much left over outside of my short and long-term savings accounts/goals and I’m only 34. I haven’t invested the time to really know how to invest, but I spend a good part of my energy working. I know its a catch-22.

Carla
Carla
7 years ago
Reply to  Lisa Aberle

I am open to just about any idea. Just like with many suggestions shared here here, I will use what I can and leave the rest.

Trading time for money is a huge barrier and its difficult to find people in the online PF world that’s in a similar situation. Most people either young and healthy with full of unlimited energy, married DINK or with young children, or middle aged (or close to it) and pretty set. With that said I do look forward to reading more on the subject from you!

ed
ed
7 years ago

This is NOT a recommendation, because you won’t “Get Rich Quick,” . . . it’s Just the way I have been investing for the last 17 years. Warren Buffett, Rule #1: Don’t Lose. People over 65, spend 4 time as much on medicine and . . . millions of baby-boomers are getting over 65 every day. Personally, I like a Dividend paying stock, . . . that’s Dividend goes up, EVERY year, for over 50 years, http://www.investor.jnj.com/divhistory.cfm . . . that has a “Dividend Re-Investment Plan” (DRIP) . . . that automatically “Compounds” all the Dividends and . . .… Read more »

John S @ Frugal Rules
John S @ Frugal Rules
7 years ago

Good for you for getting committed to investing this year! I love investing and talking about it as well. I find that many people make mistakes when it comes to investing (myself included) because we don’t keep our emotions separate from our money. When we don’t separate the two then we make decisions that are led by our fears rather than commitment or knowledge. The thing I found which helped out most was getting some education. There’s plenty of free and decent investing education available on the web. That education breeds confidence and desire to invest. I also find that… Read more »

Amy
Amy
7 years ago

My husband has never been interested in Investing (with a capital I… Wall Street, etc.) But that does not mean he doesn’t make investments. He recently took over an auto repair franchise, investing in a local business and giving himself a full-time job. We’re buying a new house since we’re having a baby, and instead of selling our current house, we’re going to rent it out. While we’ll break even on the rental on a monthly basis, basically someone else will be building our equity for us. We do have IRAs, too. But I guess you can say that my… Read more »

Darth Yoda
Darth Yoda
7 years ago

A word of caution is needed here I think. The stock market (or the markets in general) are not a magical place where everybody puts in his/her money and we all win in the end. It is a zero sum game where in order for you to profit and come out with more than you put in, someone has to lose. And of course it goes the other way too. Intelligent people like Warren Buffet, who know how to win, play this game and you are pitted against them. That is not to say that you need to be a… Read more »

Ross Williams
Ross Williams
7 years ago
Reply to  Darth Yoda

“The stock market (or the markets in general) are not a magical place where everybody puts in his/her money and we all win in the end. It is a zero sum game where in order for you to profit and come out with more than you put in, someone has to lose.” This is flat out wrong. It is not a zero sum game at all. As the productivity of a business grows, so does its stock value. Everyone who owns the stock gains and no one loses. That is why you will usually come out ahead if you stick… Read more »

Darth Yoda
Darth Yoda
7 years ago
Reply to  Ross Williams

I suppose I was wrong then, there is a free lunch after all and it’s the free market that provides it. Lets all buy index funds indiscriminately and we ll all be rich! I ll have to revise my notes …

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
7 years ago
Reply to  Darth Yoda

The stock market is not a zero sum game. If company X invests $1 million into a new product, and that product saves other businesses $20 billion a year, then that $1 million just effectively created $20 billion. The owners and consumers all win. There are some losers, but more people come out on top. That’s how economic progress works. Think of Henry Ford and all of his cars.

My Financial Independence Journey
My Financial Independence Journey
7 years ago

I am a big proponent of investing, and in particular dividend growth investing (my current passion). If you want to build up passive income streams easily, dividends are the way to do it. By selecting socks with a consistent history (10+ years) of raising dividend distributions, you will be on your way to building solid passive income. But like all investing, there is a chance that you will lose money. But by keeping your stock selections conservative (Blue chip, S&P500 type), you’ll get capital gains approximating the S&P500 and the dividend payouts on top of that. It is true that… Read more »

Jenny
Jenny
7 years ago

Could you please include a discussion about taxes? I have never invested outside of a retirement account (401k and Roth) because I don’t understand how the taxes work, what long and short term gains are, what happens if I sell at a loss, etc. I have a general understanding of how stocks work and how to invest, but I’m terrified that even if I pick several successful investments, I will lose all of my winnings to the tax man.

My Financial Independence Journey
My Financial Independence Journey
7 years ago
Reply to  Jenny

Jenny, Taxes can get complicated, so I’ll try to keep this brief. First, don’t worry about losing your gains to the tax man. You’ll lose some of them, but you’re probably already losing a way bigger portion of your salary. Short and long term just refer to whether you’ve held the security for a year or more. Taxes on most dividends and capital gains are taxed at “qualified” rates, which are way less than the “ordinary” rates that your wages are taxed at. If you lose money on an investment, you’ll usually have a capital loss, which will lower your… Read more »

Jenny
Jenny
7 years ago

Thank you! Will they mail you a tax form at the end of the year or is this something I need to keep track of myself?

My Financial Independence Journey
My Financial Independence Journey
7 years ago
Reply to  Jenny

Jenny,

Your brokerage account will send you a 1099 form at the end of the year. This will report your dividends and distributions.

Any descent brokerage account will also keep track of your cost basis. This information is needed in order to computer your capital gains/losses when you sell a stock.

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