Our Most Popular Articles on the Very Fundamentals of Investing

1. The Importance of Rates of Return on Investment Performance

This is the first article we put in our Investing Basics sections because this article introduces readers -- through both explanation and example -- to the importance of rates of return and cautions them to not make decisions (eg. buying and selling too often, picking high-cost mutual funds and ETFs, paying too much for brokerage or advisory fees, etc.) that will decrease your overall rate of return. Most people don't understand the math here - a 2% difference in return rate can mean the difference between $1 million and $300,000 in 50 years of investing. If retail investors only attempted to decreases the drag on return that bad decisions create, they would do so much better in the stock market over the long-term. In addition to this, however, this article will help you build some intuition over the power of compounding returns over the long-run.

2. What is a stock?

As simple as the title sounds, this article is a very basic introduction to what a stock is. If you're going to be buying something, you should have a clear understanding of what it actually is. Stocks represent ownership stakes in firms - they literally mean you own a piece of a business. Therefore, when you buy a stock, you should generally want to make sure you're buying a business worth owning.

3. What is a mutual fund?

After individual stocks, mot people move on to mutual funds in their understanding of the equities markets. Mutual funds are, sated simply, a pool of stocks where you buy a share in the pool (and thereby own a piece of every stock in that pool) instead of buying the individual stocks themselves. Mutual funds are all around us and they make up a vast amount of the equities landscape - they are probably in your 401k, your IRA, pension fund, and many public pensions and endowments invest in mutual funds.

4. What is an exchange-traded fund (ETF)?

An ETFs is like a stock and a mutual fund combined in one - they're similar to mutual funds in that they are conglomerations of stocks but they trade more like traditional stocks in terms of liquidity. Additionally, ETFs are mostly not actively managed, but are instead designed to passively mimic indexes (eg. the Dow Jones) or to adhere to certain strategies (eg. tech ETF). 

5. Three Typical and Common Investing Mistakes

The three big reasons people don't do well in the stock market are that (1) they don't take enough risk, (2) they buy and sell too often, and (3) they try to pick stocks but they're bad at it. If instead most retail investors invested in high quality and low cost (refer to #1 above) mutual funds or ETFs, they would likely do a lot better for their financial selves over the long-term. 

6. There's Always a Recession Coming - Don't Get Greedy and Don't Get Naive

This article will add a little macroeconomic realism to your overall understanding of the economy and the stock market. Too often do financial blogs, financial podcasts, financial books, and financial shows -- in an attempt to give simple and easily digestible personal finance advice to the masses -- tell people that they should simply dollar cost average over the long-term without ever thinking about the broad macroeconomic landscape that they are investing in. This isn't wise. 

Of course you shouldn't be overconfident about your ability to understand what's going on in the economy and you cannot predict when the next recession will hit, but if you have a brain in your head you can surely see if (1) the market is broadly overvalued and (2) how long the latest bull run in the equities market (or any market) has been going relative to historical standards. Based on this, you might temper your investing (to pile up some dry powder in the form of cash) a bit in overvalued markets or those in which the bull run is approaching record lengths.

7. Sometimes you have to take big bets to win big, BUT only if you can handle the risk

If you own 10,000 stocks, no single stock will ever make you wealthy. As Warren Buffet has stated on multiple occasions, over-diversification will not allow you to make truly spectacular investing returns based simply on mathematics. Of course, for most investors, diversification -- broad diversification -- is a good idea. For those investors who are more-knowledgable and more capable of bearing the risk that comes with fewer equities positions, over-diversification will create a situation where extreme success in a stock pick will not yield to extreme portfolio growth (because the gains will be diluted among the many stocks in this overly-diversified portfolio).