Module 7: Investing Fundamentals

Inflation is Stealing Your Money

Reality: Cash loses purchasing power every year due to inflation

Example: Over 10 years at about 3% average inflation, $10,000 keeps roughly $7,400 in purchasing power. This is illustrative, not a forecast.

Saving alone isn't enough. You need your money to grow faster than inflation.

The Power of Compound Interest

Einstein allegedly said: "Compound interest is the 8th wonder of the world"

How it works: You earn returns on your principal PLUS returns on your previous returns

Example:

• Year 1: $1,000 @ 10% = $1,100
• Year 2: $1,100 @ 10% = $1,210 (you earned $110, not $100)
• Year 30: $17,449 (growth accelerates over time)

Index Funds (Recommended for Most People)

What: A fund that tracks a market index (like S&P 500)

Why: Low fees (0.03-0.20%), automatic diversification, consistent returns

Example: VTI (Total Stock Market), VOO (S&P 500)

Historical performance: S&P 500 averaged 10% annually over 50+ years

401(k) / IRA (Tax-Advantaged Accounts)

These are not investments themselves. They are account wrappers that hold your investments, like index funds. The wrapper mainly changes how the money is taxed, not what you put inside it.

401(k): Usually offered through a job and funded from your paycheck while you work there. Contributions reduce taxable income, and many employers match part of what you put in.

Traditional IRA: An individual account you can open on your own. Possible tax break now, taxes later when you withdraw.

Roth IRA: Also an individual account. You pay taxes first, and qualified withdrawals may be tax-free later.

HSA (only if you have an eligible high-deductible health plan): a health savings account tied to your health insurance, not investing. Some people invest the money inside it for future medical costs.

Max contributions (2026): $24,500 (401k), $7,500 (IRA)

If the account is the wrapper, what goes inside it?

Your actual investments, such as low-cost index funds or ETFs. The account type mainly changes the tax treatment, not the investment itself.

General education, not financial, tax, or investment advice.

Individual Stocks (High Risk)

What: Buying shares of specific companies

Risk: Company can fail, stock can crash

When it makes sense: If you're knowledgeable and willing to research. Still, most should stick to index funds

Example: Apple, Microsoft, Tesla

Bonds (Lower Risk, Lower Return)

What: Lending money to government or corporations

Return: 3-6% typically

When to use: As you get older and want stability. 60/40 stocks/bonds is common for retirees

Sound Money: Gold and Bitcoin

What: Assets people may use as stores of value because they are scarce and not issued like ordinary fiat currency.

Gold: Gold has been used for thousands of years as a store of value. It is physical, globally recognized, and difficult to produce quickly. Its tradeoffs are storage, transport, verification, and custody.

Bitcoin: Bitcoin is digital, scarce, and runs on a public network with a fixed supply rule. Its tradeoffs are volatility, self-custody responsibility, regulatory uncertainty, and the need to understand how it works.

Why it matters: Sound money assets are not mainly about earning yield. They are often used to try to protect purchasing power over long periods.

Risk: Prices can move sharply. Gold and Bitcoin are very different assets, and neither should be treated as risk-free.

Allocation: Some learners keep a small allocation, often cited as 1-5%. This is illustrative only and appropriate only for people who understand the risks.

Learn more: Bitcoin Sovereign Academy

401(k) / IRA / HSA (Account Wrappers)

Wrapper, not investment

These are not investments themselves. They are account wrappers that can hold investments like index funds, ETFs, or bonds. The wrapper mainly changes how the money is taxed, not what you put inside it.

401(k): Usually offered through a job and funded from your paycheck while you work there. Contributions reduce taxable income, and many employers match part of what you put in.

Traditional IRA: An individual account you can open on your own. Possible tax break now, taxes later when you withdraw.

Roth IRA: Also an individual account. You pay taxes first, and qualified withdrawals may be tax-free later.

HSA (only with an eligible high-deductible health plan): a health savings account tied to your health insurance, not investing. Some people invest the money inside it for future medical costs.

Max contributions (2026): $24,500 (401k), $7,500 (IRA)

The 100 - Age Rule (Simple Approach)

Formula: % in stocks = 100 - your age

Example:

• Age 30: 70% stocks, 30% bonds
• Age 50: 50% stocks, 50% bonds

Why: Stocks are volatile but grow over time. Bonds are stable. Younger people have time to recover from crashes.

Three-Fund Portfolio (Bogleheads Method)

Popular among smart investors for simplicity and performance:

• 60% U.S. Stock Market: VTI or VTSAX
• 30% International Stocks: VXUS or VTIAX
• 10% Bonds: BND or VBTLX

Rebalance once per year. That's it.

1. Panic Selling During Crashes

The mistake: Market drops 20%, you sell everything, lock in losses

The reality: Markets always recover. Every crash in history has been followed by new highs

What to do: Hold and keep buying. Crashes are sales on stocks

2. High-Fee Funds

The mistake: Paying 1-2% annual fees on actively managed funds

The reality: 1% fee over 30 years = ~$200K less in retirement on a $500K portfolio

What to do: Choose index funds with <0.20% expense ratios

3. Trying to Time the Market

The mistake: Waiting for the "perfect" time to invest

The reality: Time in market > timing the market. Even pros can't predict tops and bottoms

What to do: Dollar-cost averaging. Invest consistently regardless of price

4. Not Starting Early

The mistake: "I'll start investing when I make more money"

The reality: Starting at 25 with $200/month beats starting at 35 with $500/month (due to compound interest)

What to do: Start with ANY amount now. Even $50/month matters