Investing Basics

Stocks

A share of stock is a fractional ownership stake in a company. Shareholders benefit if the business grows in value or pays dividends, and they bear the loss if it declines. Individual stocks offer the highest potential return of the mainstream asset classes and also the widest range of outcomes.

Index funds and ETFs

An index fund holds every company in a market index, such as the S&P 500, in proportion to its size. An exchange traded fund (ETF) is an index fund that trades on an exchange like a stock. Both give broad diversification at very low cost and are the default starting point for most long term investors. The Goat Academy guide to stocks and index funds covers this in more depth.

Bonds

A bond is a loan to a government or company in exchange for regular interest and repayment of the principal at maturity. Bonds are generally less volatile than stocks and are used to dampen the swings of a portfolio, though they carry interest rate risk and credit risk of their own.

Real estate and alternatives

Property, commodities, and private investments can add diversification, but they tend to be less liquid, harder to value, and more expensive to hold. Most beginners are better served by mastering stocks and bonds before adding alternatives.

Risk profiles

Your risk profile combines how much volatility you can tolerate emotionally with how much you can afford financially given your time horizon. Someone investing for 30 years can hold a larger share of equities than someone who needs the money in 3 years. Getting this balance honest is more important than any single security selection.

Set financial goals

Separate short term goals (a purchase within 3 years) from long term goals (retirement, financial independence). Short term money belongs in cash or short dated bonds. Long term money is what gets invested in growth assets.

Choose the right account

In the United States, employer sponsored plans such as a 401(k) and individual retirement accounts (IRAs) offer tax advantages for long term investing, while a standard brokerage account offers flexibility with no contribution limits. In the United Kingdom the equivalents are a workplace pension, a SIPP, and a Stocks and Shares ISA. Tax treatment differs by country and personal circumstances, so check the rules that apply to you.

Open an account and execute

Established brokers such as Vanguard, Fidelity, and Charles Schwab, along with app based platforms such as Robinhood, allow accounts to be opened online with modest or no minimums. Once funded, buying an index fund is a matter of entering the ticker, choosing an order type, and confirming the quantity. The Goat Academy guide to trading tools explains how to compare platforms.

The 110 rule

A common rule of thumb subtracts your age from 110 to estimate the percentage of a portfolio to hold in stocks, with the remainder in bonds. A 30 year old would hold roughly 80% equities. It is a starting point for thinking about allocation, not a prescription.

Passive versus active

Passive investing means holding the whole market through index funds and accepting the market return. Active investing means trying to beat the market by selecting securities or timing entries. The evidence over long periods shows most active funds underperform their index after fees, which is why passive investing is commonly used as the foundation of a long term portfolio.

Dollar cost averaging

Investing a fixed amount at regular intervals, regardless of price, removes the temptation to time the market. When prices are low the fixed amount buys more units; when prices are high it buys fewer. Over time this smooths the average purchase price and, more importantly, keeps the habit of investing consistent.

A sound portfolio is diversified across companies, sectors, and geographies, rebalanced periodically, and cheap to hold. The mistakes that undermine it are well documented.

• Attempting to time the market. Missing a handful of the best days in a decade has historically cut long term returns significantly, and the best days often arrive close to the worst ones.
• Paying high fees. A 1% annual fee sounds small, but compounded over 30 years it can consume a quarter of a portfolio's final value.
• Concentrating in a single stock or theme. Diversification is the one free lunch in investing; concentration is a bet on being right.
• Investing without an emergency fund. Holding 3 to 6 months of expenses in cash means market declines never force you to sell at the wrong time.
• Reacting to headlines. A written plan, reviewed on a schedule rather than in response to news, protects against emotional decisions.

Felix Prehn, the economist and former investment banker who founded Goat Academy, teaches the full framework behind these principles in the Wall Street Protocol programme. The material on this page is a starting point rather than a substitute.