AAR05 - What Kind of Investing is Right for You?

22:05Dave Ahern:You know, I'm never going to be somebody that advocates for trying to time the market in that way. And so I didn't want to have to worry about that of the money dipping and suddenly can't afford a house anymore or trying to withdraw it. And, oh, right, now we have to pay a bunch of capital gains taxes on the returns that we generated. And it just complicates the situation a lot more. So to simplify it, I actually decided to pull over to the high yield saving account. You want to take a minute and kind of explain the idea of capital gains a little bit? Yeah. So capital gains are any gains or returns that you generate off of your investments.

22:38Dave Ahern:That's kind of the gist of it. How this affects you is say you invest$1 ,000 into a taxable investment account, kind of take the simpler example, and you generate 10 % returns on that. So you earn$100 from the stock market. When you go to sell those investments and quote unquote realize those gains, which means those gains have turned from just something in your brokerage account saying the value of your investment has increased 10%, you're turning that into, okay, I've sold my investment and I've actually earned those$100, that 10 % return that I've generated. When you do that, when you realize those gains, you pay taxes on those gains.

23:17Dave Ahern:There's a little bit of a game to play here where you can reduce those gains by making sure you held that investment for longer than a year. So you can significantly reduce it to the point of reducing it from, I believe, the lowest rate for less than a year investment is around 20 % or so. You can reduce that all the way to 0%, depending on how much you earned or what percent you earned on your returns. So something like taxable investment account, you're going to pay those capital gains taxes, but you get to avoid those entirely with something tax-advantaged like a Roth IRA or a 401k. You still generate gains, but you don't have to pay capital gains taxes on them because you're using a special government-backed retirement account.

23:58Dave Ahern:So now we're going to go over some general good ideas for people in different situations or different mindsets or different goals. First one we're going to cover is good options for beginners. From my point of view, the two best options for beginners would be something like ETFs, which I know that Dave mentioned earlier, somebody who's kind of a beginner in the space, doesn't want to commit a ton of time to it. ETFs are a great option. They're easy to invest in. Again, that's what I personally invest in. I tend to invest in VOO, the ETF that just tracks the overall stock market as best it can.

24:27Dave Ahern:And you can not expect that, but historically has returned around 10.5 % or so. And then the other best option, which Dave and I both back personally, is a high yield savings account. Currently, that returns around 4 % or 4.5%. You should expect that to fluctuate a bit as interest rates fluctuate. So previously, interest rates were very high. I believe my account was up to like 5.5 % at one point. It'll probably drop as low to maybe 2.5 % or 3 % or something. So that 4.5 % isn't going to be a solid rate necessarily. But through a high-yield savings account, you're going to be able to get a guaranteed return on whatever interest rate you're promised at that point in time.

25:03Dave Ahern:And both ETFs and high-yield savings accounts are going to require absolutely little or no time or intervention along the way. It's just going to happen pretty passively in the background. Then good options for people who just want low risk. Again, we have a high-eld savings account around 4.5%. And the other option is bonds at around 4.5 % as well. Those rates tend to follow pretty closely to each other. Bonds might be a little bit higher. But the downside to bonds is bonds are essentially a promise from the U.S. government that they're going to pay you back plus interest for the loan that you're giving them.

25:36Dave Ahern:You're essentially loaning money to the U.S. government. And this means that it's 100 % guaranteed unless the entire U.S. market defaults, which we're going to have much bigger issues than whatever money you put into your bonds, frankly, at that point. But the downside to them is you have to promise it for a certain amount of time. So this could be a six-month bond, a year bond, five-year bond, 10-year bond. And so your money is going to be tied up and not nearly as liquid as something like a high-yield savings account. and that's why I personally stick with a high yield savings account is I know that I can pull that money out tomorrow if I need to pay for an emergency instead of thinking okay well now I have four years so I can pull that money out and that's never going to be able to help me in an emergency have you ever invested in bonds Dave or have you always seen it from the same point of view no I've I've I have invested in bonds I've done I've done both types so I've done treasury bonds so you can buy a wide range of things from a couple day bonds to 30 year bonds here in the US.

26:32And then I've also bought corporate bonds. So those are the same kind of idea where it's debt that the company is offering. So we give Microsoft a loan, for example, for$100 and then they give us a bond and pay us a dividend of four and a half percent. And then when it's over, they give us$100 back and whatever we earn on that. So it's kind of the same thing. It's a little more complicated than that but yeah it's I have used both.

26:56Dave Ahern:And what made you at the time choose something like a bond over something like a high yield savings account? Because I wanted at the time the high yield savings accounts I was working at Wells Fargo at the time and they were paying a blistering 0.05 percent on the savings account and so it was really it was not worth it. Yeah Yeah. That's more like just a normal savings account nowadays in terms of returns. Yeah. Yeah. Yeah. Yeah. Now, nowadays, you know, I think I have, I have a couple of accounts and they're paying three and a half, 4%. So it's, it's much more air quote normal than it was at that time.

27:36And bonds were earning a better return, both treasury and corporate bonds. Yeah.

27:41Dave Ahern:And you'll notice that even for people who are low risk or beginners, we're, we're not going to recommend just a standard savings account to anybody for growing their wealth because it's going to pay you essentially nothing. Like they've said, 0.05%, 0.01 % I've even seen before. You can think of it as essentially zero, especially when you consider that once you take out the average inflation rate of around two and a half or 3%, your money, it might as well just be sitting as cash. There's no reason to keep it in a standard savings account like that. Put it under the couch, to put under the mattress if you're really worried.

28:17Dave Ahern:But yeah, it's not going to give you any advantages over something like a high-hold savings account. A high-hold savings account is going to be just as flexible, just as liquid, just going to pay you a higher return than a standard bank savings account. I'd highly recommend steering away from that. Then if we move on to people who just want to get the big bucks, they just want to generate the max returns possible, the first best option to me is individual stocks. You can theoretically earn infinite returns from something like this. You have infinite upside to what you can return if you happen to pick the right stock or you happen to get lucky.

28:46Dave Ahern:So that's a place you can generate the max returns. It will require more of a time commitment, but a lot of people like Dave and Andrew enjoy doing that kind of stuff. They see it as a hobby, they see it as a mental exercise. And so if that's something you're interested in doing in a world you're interested in diving into, then it can have infinite potential for you. Another option is real estate. Again, could theoretically have an fit potential depending on what you're investing in but historically real estate has earned about 10.5 or 11 pretty close to what the stock market has historically returned but with something like real estate you could have a physical asset that you could live in for example you know if it's just your your residential home then you could live in it while still generating that same return so that can be a fantastic opportunity and i can't sadly go without mentioning crypto that it could theoretically generate you max returns.

29:35Dave Ahern:It has made millionaires out there, but I'm not going to speak too far on that. That's not, that's not something that I'm going to recommend for many people out there. And then the last one is a good option for long-term. So as I mentioned before, I think that a 401k is one of the most powerful accounts out there. If you can, if you have an employer match specifically, if you don't have an employer match, I personally feel like there are other better options out there, like a Roth IRA, where you can still get tax advantages. Maybe not quite as powerful because you are investing, like we discussed before, the post-tax funds as opposed to pre-tax funds.

30:09Dave Ahern:So you don't have quite as much momentum behind you to work with. But if you can get an employer match, whatever return you're generating on it, you're adding that on to an immediate guaranteed 100 % return. And you're never going to be able to beat that. Plus all of the tax advantages of all the gains along the way, like we discussed. And that's going to have a similar return rate to the stock market. So 10.5 % or 11 % approximately. you are likely to be limited to your investment options through something like 401k. Is that your experience as well, Dave? Yeah, absolutely. Yeah, sure. Yeah. You generally have fewer, fewer choices to choose from.

30:42Dave Ahern:Yeah. And one thought there is, at least in my experience, the default for each brokerage that you're signed up for, for a 401k through your employer is going to by default throw you in a target fund. So they're going to take your age, they're going to calculate out to 65 years old, and they're going to set a target fund for, you know, 2050, 2060, 2070. I would tend to personally steer away from those solely because those are trying to balance your risk automatically on the back end without, you could have visibility into it if you tried to look into it, but by default, they're not really going to explain that much to you.

31:15Dave Ahern:Again, this is just in my anecdotal experience. The problem I have with this is as you get older, or even starting from the beginning, it always tries to balance you between higher risk investments something like the stock market and lower risk investments something like bonds or just very low risk investments in stock market so it will never be able to generate the max returns free possible because it's always trying to lower your risk and then it tries to lower that risk more and more by balancing a higher and higher percentage towards those lower risk investments and a lower percentage towards the higher risk investments over time the older you get and the closer to retirement you get and for me this just isn't really worth it you know if i'm still 30 years away from retirement, to some degree, I don't care what fluctuations are happening in between.

32:00Dave Ahern:Those are going to level out over a period as long as 30 years. So there's no reason for me to worry about trying to balance in less risk at that point in time until I'm getting maybe within five or 10 years of retirement. At that point, I might want to balance risk away a little bit. But up until then, I just want to be generating the max returns possible. So what I did was I went in and looked through the few fund options. I believe that I have Charles Schwab, and I think this can also vary by employer as well, but for my personal 401k plan, I had options of about, I think it was eight different funds that I could choose from.

32:34Dave Ahern:And I went through them and just quickly tried to figure out what one was first off historically performing as close to the stock market as possible and had holdings that were as close to the overall stock market as possible. So I was looking through the holdings and usually would hold a couple funds within this overall fund that was in the 401k. And I was looking for funds that were holding like the S &P 500 or an overall market index or something like that. Again, the options are going to be very personalized to you and your employer and brokerage. So I can't give specific references there. But that's what I look for personally, to try to generate the maximum returns possible and not trying to worry about balancing in risk as much.

33:13Dave Ahern:Do you have any other general recommendations for people in other situations, Dave? Right now, when you buy more carpet at the Home Depot, you save more. During our Buy More, Save More event going on now, upgrade your carpeting with the top brands and save up to 15 % off installed carpet projects. Installation starting at just 49 cents per square foot. Select from a wide assortment of carpet to fit your room, lifestyle, and budget during the Buy More, Save More event at the Home Depot. Offer valid August 27th through September 13th, 2026. Base price for standard installations only. Excludes Traffic Master and Stock Carpet.

33:45Dave Ahern:For licenses, see HomeDepot.com slash license numbers. This episode is brought to you by Welch's Fruit Snacks. Back to school season can be tough on parents, but choosing a snack you and your kids can both get behind doesn't have to be. Stock up on Welch's Fruit Snacks, made with whole fruit, and now made with no artificial dyes. It's a snack kids already love, and one you can feel good about giving them. Go back to school with Welch's Fruit Snacks, now made with no artificial dyes. um yeah i think there are a couple things that kind of spring to mind these are all great options by the way i would depending on what your level of engagement you want to have with how much you control your investments or how much you control your money you can go with a mixture of for example i want to i want to buy individual stocks but i want to have a good base of air quote safer money, any investment is going to offer some risk.

34:44So you just have to acknowledge that. But you can invest in, let's say, put 60 % of your money in a basket of ETF funds. And then you have maybe 40 % of money that you put in individual companies because you like the process of picking those companies, but you also don't want the stress of having your portfolio based on those individual picks that you're trying to do. And so that's one way to do it. And you can adjust Just that mixture as much as your risk tolerance and your engagement really matters. And then the last thing is there are other alternative investments. And I'm not talking about like, you know, the exotic crypto things and like options and all that stuff.

35:25I'm talking about things of the nature of commodities. People trade oil. People trade, you know, in the dollar. People trade on gold and silver. You can also do things like private equity and private credit. Now, those are generally for bigger dollar amounts at this point, but there are, I believe there's going to be options coming for the general public to be able to take advantage of those. And basically what they do is they offer higher returns, but you also have to lock up your money for a certain period of time too. So it's not 100 % panacea. So it can be a little bit like a traditional IRA or a 401k where you give them a blank amount of money for five years and you can't withdraw it.

36:09So the liquidity is certainly lower, but the returns potentially could be higher too. So those are options that are starting to become available to individual, air quote, normal people like us. So it's something to consider if you want to kind of diversify your portfolio into other options as well.

36:28Dave Ahern:I think that's a very important point because something we haven't really touched on is diversification. So if all you're investing is, let's use oil, for example, if all you're investing is oil and oil drops in value significantly, then you're screwed because you had all of your money in there. And we absolutely want to avoid that. So we want to have your money spread around in different places, maybe an investment account, maybe IELTS savings and then something like gold or whatever. Making sure your money is spread around in at least two or three different places is kind of a good starting point, I would say.

36:57Dave Ahern:Have your money in a few different places so that if one of those absolutely tanks or drops significantly and you need to access those funds at that point, that you're not going to be out for a complete loss. I think that can be life-changing for somebody financially to have your money in different places, to grow at different rates and drop at different rates. One other thing I wanted to kind of throw out there about that idea of diversification is you can do this with ETS. I'll give you an example. But when I was at Wells Fargo, the financial advisor gave me some suggestions of how I could structure my portfolio within the 401k.

37:35Now, we had 15 or 20 options. So we had a bigger menu to choose from. But you could apply the same idea to just a broad stock market. So I had a mixture of large fund ETFs, mid-cap ETFs, and small cap ETFs. So I had a mixture of those. Then I also had a global fund. So it matched all the stock markets in the world. And then they also had a couple different bond funds. And those were smaller allocations. But so you can play with this kind of stuff because in the world of ETFs, the world is your oyster. Because there is literally an ETF for almost everything. And I wouldn't be surprised if there was an ETF for everything.

38:15And so there's a lot of options that you can use to kind of spread your bets around. So, for example, if you wanted to follow what Evan was suggesting and you wanted to have maybe some gold in your portfolio, you can buy an ETF that covers the gold market. And so you don't have to go through the process of finding individual gold suppliers and all the work that goes into that. You can just buy an ETF that does the same thing. Or you could do the same thing for bonds. And so that's an easier way to fly if you want to try to broaden your portfolio and you have the options to do it. Some 401ks are only going to offer two or three options.

38:52And so you may not have that flexibility, but in your brokerage accounts, whether it's a Roth, traditional, or regular, you will definitely have those kinds of options to diversify if you want.

39:02Dave Ahern:Yeah, I absolutely love that. One thing you mentioned there that I'd like you to dive into just a little bit is you mentioned large cap, medium cap, and small cap. What do you mean by that? And how does that really affect your investments and outlook and everything? Yeah, okay. Okay. So really what that means is when you think about the companies that you could potentially invest in, you think of some of the world's largest businesses like Google, Microsoft, Amazon, Berkshire Hathaway. Those are all what you would consider large cap companies. So these are basically the largest businesses in the world, and they're all kind of glumped in together.

39:38And the stock market, if you look at something like the S &P 500, which is what most individual stock investors follow or look at, it's a collection of 500 of the best businesses in the United States. And they generally are ranked by their market cap. And so what that means is the stock price that it sells for versus the shares outstanding. And I'm not going to go into all that gobble goop. But basically what it means is the bigger the company, the more they qualify it as a large cap. and then you have mid caps and then you have small caps. And small caps would obviously be the smallest companies.

40:12So they may generate a lot of revenue, but there's not a lot of market participation and a lot of people buying the company and a lot of shares outstanding. And so those are generally smaller businesses. And generally, as you work up the flow chart, if you will, from smallest to largest, the volatility gets less as you get higher up the food chain. Now, it's not always the case. Tesla is a perfect example of a large cap company that is quite volatile. But the general rule is as you go up the flow chart, it gets less and less volatile. And it's easier to invest in. It feels safer to invest in Amazon than it does a very, very small company that you've never heard of that specializes in cleaning gutters in Springfield, Missouri.

41:01I'm not saying there is a company out there that does that, but that's the kind of granularity you can get with small caps. So that's kind of the differentiator. And the returns that you get from those can be different. And during different market cycles, some will go in and out of favor. And so that's why sometimes people will recommend having a mixture of those because it's another form of diversification. So when Amazon is out, maybe a small cap is in and vice versa.

41:28Dave Ahern:Yeah. And then when that small town in Indiana moves to a different style of gutters that that company isn't manufacturing, you want to be diversified away from that so that your entire portfolio is a tank. Exactly. Right on the nose. So just to kind of summarize a little bit of some of the popular stock market options out there, we have the taxable investment account, in my opinion, best for liquidity. You're able to pull that out whenever you want, but you're going to get fewer tax advantages to play around with and try and maximize your returns as much as possible. Then we have the Roth IRA, which is great for being able to withdraw contributions specifically early while still getting tax advantages.

42:03Dave Ahern:Then we have the 401k, like we've discussed a lot. Best for just maximizing tax-free returns as long as you're willing to wait until retirement, and especially if you have an employer match available. There's also something called a 529 account, which is a savings account that you're able to invest in and will grow tax-free and has some other tax advantages, but it's specifically aimed towards a child's education. So you as a parent are able to contribute to a 529, grow that tax-free, and then when that child is of age, I'm not sure what age it actually starts at, I believe it's 18 years old, when they can pull from it and start using it for educational expenses.

42:36Dave Ahern:It can even be room and board, food, books, any of those educational expenses. And then another last one I'll mention is something called a custodial account. This was actually something my parents set up for me and put a little bit of money in there where you can set it up for your child and, again, grow that money tax-free in that account, invest it as you want. And then when that child reaches adulthood, it basically transitions over to their account, their own investment account, and they're able to invest it or withdraw it or use it as they wish. And for me, that's a great way to set your child up financially and kind of land them on their feet when they're hitting the real world, quote unquote.

43:11Dave Ahern:So when they move out, now they have some money to be able to support themselves and get used to managing their finances and all that sort of stuff. I think it can be a really powerful lesson for children. David, do you have anything left? Which do you think of those is the best? For me, a 401k is just the most powerful. That is specifically if you're able to get an employer match. Without an employer match, I think the conversation shifts to probably a Roth IRA being the best because it's a great all-around account. It's going to give you solid flexibility. It's going to give you amazing tax advantages.

43:45Dave Ahern:But if you have an employer matching a 401k, if you're contributing, you know, let's just make up the number$500 or something to it. Your employer hands you$500 and then you can go earn returns on that$1 ,000 that you now have. That's an absolutely unbeatable proposition for me, for anybody in any situation. All right, Dave, thank you so much for taking the time to chat with me today. Let me know, listeners out there, any investment accounts that you currently use or ones you're considering or want to know more about, you can email me at evan at investingforbeginners.com, or you can just comment on this podcast episode.

44:18Dave Ahern:And remember, financial freedom is built one smart move at a time. Keep it simple. Keep it steady. And at any rate, I'll see you next time. Peace.

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