Investing is Confusing: 3 Things You Might Be Getting Wrong (But I Still Love You)

Because I never shut the fuck up about investing, I have a lot of conversations with a lot of different people on the topic. Whether these conversations be with barstool strangers, friends, acquaintances, or a patron of one of my Invested Development workshops, I hear a few common misconceptions about investing repeated over and over.

I can understand why! Investing in the stock market can be confusing, because it’s not like, natural or intuitive. Being “good” at investing requires practice thinking and talking about investing, and that’s pretty much it. (Well, and a solid helping of patience.) No natural “talent” needed, because there’s no such thing!! Thank the lawd!! So, let’s practice?

3 things I hear people say about investing that are, well, wrong

1. When I ask someone how they’re invested, and they respond, “in my 401k.”

Putting money into a retirement account like a 401k (or Roth IRA, traditional IRA, etc.) is a fantastic start, and if you are actively using your 401k I will open-mouth kiss you right now!! But it is important to understand that a 401k is just an account, just like a checking account and a savings account are just accounts. A 401k is not itself an investment.

A 401k is just a storage unit. It is the garage where you park your car. It is the adorable Pinterest mason jar for your which holds your animal fetuses in formaldehyde (just me?). It is your mid-90s pink and teal Caboodles where you hoard your collection of novelty erasers. It is just the shell of the oyster—and the investment is the pearl that is growing inside that shell.

Investing is buying something that you think will increase in value over time. This can be done inside a special retirement account like a 401k, or it can be done in a regular ol’ non-retirement account (called a brokerage account).

When you tell your company that you want some amount of money to be taken from your paycheck and whisked away to your 401k, cash is deposited into your 401k. And there it sits, chillin’ in cash, until you make a decision about how to invest it. Now, some companies have 401k programs where cash is automatically invested, but this is still not the norm. For the most part, the responsibility is on YOU to invest that money—this usually means selecting a strategy (such as “medium risk”), a fund, or multiple funds from a list of ten to twenty options provided by your 401k. (If you’re investing in a Roth or Traditional IRA, you’re totally on your own to make a choice.)

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2. When I ask someone how they’re invested, and they respond, “in funds.”

Recently, I was talking to a woman who told me she was invested in funds. When I asked her the follow-up question, “What kind of funds?” she shrugged and said, “I dunno. Some funds.” She’s not wrong! But we still don’t know what she’s invested in.

The word “fund” gets used in two very different ways, and it can be confusing! Let’s clear that up first. Oftentimes, people use the term “fund” to refer to a general savings pool, such as “my travel fund” or “my retirement fund” or “my ‘say fuck it to my job and move to Australia to sit on a white-sand beach, drink some ice-cold beers, and hit some hot, tanned dick’ fund.”

This is definitely not a wrong way to use the term, “fund.” But be careful conflating it with a second usage of the term “fund,” as it pertains to investing: A “mutual fund” or “exchange-traded fund” are investment vehicles, meaning they hold actual investments.

Again, the woman I was speaking with was indeed invested in mutual funds within her retirement account. But here’s the thing about investment funds—a fund is just a basket full of investments, whether that investment is stocks or bonds or real estate or lean hog futures. The fund itself is not actually an investment; it’s just a fancy thingy-majiggy that bundles investments together.

Said another way:

If you’re invested in a stock mutual fund, you’re invested in stocks.

If you’re invested in a bond mutual fund, you’re invested in bonds.

Say someone sends you a Harry and David basket for your birthday. First, who the hell are your friends? Wealthy suburban moms? Okay whatever I digress, but understand that it’s what’s inside the basket that counts, not the actual basket. The gift is the gouda cheese, water crackers, dried fruits, and fig jam; the basket just bundles items together for the convenience of the lazy-ass birthday gift shopper. Funds are totally the Harry and David gift baskets of investing, and IT IS GENIUS: The fund wraps a bunch of investments together, so you don’t have to go out and buy each individual investment on your own!! Here, read more about how lazy-ass investing is actually the best way to invest.

3. “My investments were better last year than this year, maybe I should change them.”

Yes, some investments are superior to others, but perhaps not in the way that you may think. The first question you always have to ask when considering the performance of your investments is: What am I comparing this to?

Say you’re invested in a stock fund. It’s very easy to look at a fund that hasn’t made any gains recently and think that it is broken.

Remember, your stock funds are invested in the stock market. And we cannot control what the stock market does in any one day, week, month, year, decade, and so on. It’s up sometimes and it’s down sometimes and that’s NORMAL. Right? RIGHT? (Everyone must nod their head in creepy, solemn agreement before we move on—this is a core tenet to understanding investing.)

If your stock funds are doing a good job, they should reflect what happens in the actual stock market. So, in years when the stock market is up 20%, your stock funds should also be up 20%. In years where the stock market is down a negative 20%, your funds should actually be down 20% too. The stock market gonna do what the stock market gonna do, and we just along for the ride.

So when you say, “Hey, my funds did better last year than they’re doing this year!!” your first step should be to look and see what the overall markets did last year and then this year. This is going to tell you a lot. (This means comparing your U.S. stock funds to the U.S. market, your international stocks funds to the international stock market, and bonds against bonds.)

This year, January through April, U.S. stocks (as measured by the S&P 500, which watches the 500 “leading” U.S. companies) are almost completely flat, which means that overall, U.S. stocks haven’t done shit so far this year. Last year, U.S. stocks were up 21.83%, which is a pretty good year in the overall stock market. If your U.S. stocks or stock funds were working as they should, then they were also up about 21% last year. They should also be relatively flat this year

(Side note: The stock market is NOT broken when it has uneventful or even bad years! Example: If the stock market were to lose half of its value next year—which don’t get me wrong would suck an Andre the Giant-sized bag of dicks—it ain’t broken. Ladies, when I say that the stock market moves up and down and up and down and that it’s natural—I am not fucking joshing around. This is important: If you believe, on any level, that a “negative” stock market is somehow broken—you’re not ready for stocks.)

For my friend, this explains why her investments did way better last year than this year. Now, if she were to have had the experience where her previous or current investments were consistently doing worse than the stock market average (remember it’s all relative), that’s when we have reason to be concerned. If this is indeed the case, one or two things could be happening: 1) She is paying too much in fees for her funds 2) The fund is performing worse than the overall market.

The two culprits here are likely related: The fund is very likely a managed mutual fund, which means there’s some rando dude in a starched shirt with way too much investing hubris working behind the scenes, making active decisions about what stocks to buy and sell within the fund. (Buy Tesla! Sell Microsoft! Buy MORE Tesla because Elon Musk is the prettiest prince boi of Mars! *lol*)

You might be thinking: “Hey!! Having someone who actively keeps a finger on the pulse of the market for me sounds like a good thing!!” WHEEELP, the history of the active money management has proven this to be shamefully untrue. Turns out, that one dude sitting in some JP Morgan office in a suburb of Boston does not actually know more about investing than the entire investing public (who is constantly voting on what the prices of stocks should be—all available information is already “priced in”). In fact, managed mutual funds underperform the big, regular ol’ market about 95% of the time, and they CHARGE YOU for this sham service. AGAIN: Money managers generally do worse than simply investing in the stock market average.

To invest in the stock market average for next to nothing, look for index funds: index mutual funds or ETFs. FYI, “index” means to follow an investing index, like the S&P 500, which is just a measure (an index!!) of the U.S. stock market.

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I hope that this helps!! This is the first in a series where I tackle common misconceptions about investing and the stock market. Have something that you’re confused about? Let me know in the comments below.

If you’d like to hire Invested Development for an Investing 101 Education Session (either personally, through your work, or with your favorite group of friends), send me an email at AmandaHoldenInvesting@gmail.com.

*This post is not investment advice, and is for entertainment purposes only. What happens in the future might be different from what happens in the past. Do your own research, please!*