Thinking About Investing? Ask Yourself These Questions First.

Summary

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WSJ Your Money Briefing: "Thinking About Investing? Ask Yourself These Questions First."

Date: April 23, 2021
Host: J.R. Whalen
Guest: Jeff Rogowsky (Investing Editor, The Wall Street Journal)

Overview

This episode of Your Money Briefing serves as a primer for first-time and novice investors considering how, when, and why to start investing. Host J.R. Whalen speaks with WSJ investing editor Jeff Rogowsky about the key questions anyone should ask before committing their money to various investment vehicles. The conversation covers establishing personal financial goals, understanding diversification and risk, comparing active vs. passive investing, and identifying trustworthy resources to get started safely.

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Key Discussion Points & Insights

1. Establishing Your Goals Before Investing

Timestamps: 02:47–04:18

• Purpose-driven investing: Jeff emphasizes that investments must be aligned with personal life goals, such as paying off student loans, purchasing a home, funding retirement, or paying for children’s education.
• “If you don’t know what those inflection points are, those points that matter in your life, I don’t think it’s possible to invest.” (Jeff, 03:24)
• Throwing money into the market on a whim is not a strategy; it often leads to unpleasant surprises, particularly at tax time or during market volatility.
• Notable caution: Many day traders in 2020 faced unexpected tax bills in 2021 because they lacked a plan.
  • “If you don’t have a plan, surprises will happen. So have a plan to help with that.” (Jeff, 04:15)

2. Understanding Diversification

Timestamps: 04:18–05:39

• Diversification explained: It involves spreading investments across different asset classes to mitigate risk.
• “Diversification matters because none of us has a crystal ball... And if you don’t diversify, you open yourself up to all these risks.” (Jeff, 04:24, 05:28)
• Even a seemingly solid investment (example: CBS Viacom) can be derailed by events outside your control, such as the Archegos hedge fund collapse.
• Market risks aren’t limited to obvious events—counterparties, geopolitical upheavals, and pandemics can also upend investments.

3. The Nuanced Relationship Between Risk and Reward

Timestamps: 05:39–07:08

• Risk and reward should be evaluated separately, not as simple opposites.
• Types of risk: volatility (how much an asset’s value changes), liquidity (ease of buying/selling), and more.
• “People make a mistake when they think risk and reward are the same coin different sides to it. They’re very sort of like nuanced vehicles that you should think in their own independent silo...” (Jeff, 06:48)
• Consider your investment time horizon (short-term vs. long-term) when weighing potential rewards.

4. Active vs. Passive Investing

Timestamps: 07:08–09:16

• Active investing: Involves a manager picking specific stocks or bonds (e.g., mutual funds), often at higher management fees.
• Passive investing: Involves tracking an index with broad market exposure—using index funds or ETFs—which offers lower fees.
• “Most mutual fund managers are just as good as my cat throwing darts to board at picking stocks.” (Jeff, 08:18)
• However, active management can still make sense in less efficient or emerging markets where passive vehicles may not perform as well.
• Key self-assessment: Is minimizing cost your priority (favoring passive), or do you need specialized guidance (favoring active)?

5. Resources for Getting Started

Timestamps: 09:28–10:54

• Start by reviewing the educational content from your current retirement account provider (401k, 403b, etc.).
• Next steps: Identify if you feel comfortable with an established financial institution or need to open a brokerage account.
• For more sophisticated needs, consider robo-advisors (Betterment, Wealthfront, Fidelity, Vanguard, etc.) or personal financial advisors.
• “You sort of can’t figure out which lane to take until you know which road you’re on.” (Jeff, 10:51)

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Notable Quotes & Memorable Moments

• [03:24] “If you don’t know what those inflection points are, those points that matter in your life, I don’t think it’s possible to invest.” — Jeff Rogowsky
• [04:15] “If you don’t have a plan, surprises will happen. So have a plan to help with that.” — Jeff Rogowsky
• [04:24] “Diversification matters because none of us has a crystal ball...”
• [05:28] “If you’re not diversified, it risks wiping you out.”
• [06:48] “People make a mistake when they think risk and reward are the same coin different sides to it. They’re very sort of like nuanced vehicles...”
• [08:18] “Most mutual fund managers are just as good as my cat throwing darts to board at picking stocks.”
• [10:51] “You sort of can’t figure out which lane to take until you know which road you’re on.”

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Important Segment Timestamps

• 02:15: Setting the scene for new investors
• 02:47: How to define investment goals
• 04:18: Why diversification matters
• 05:39: Unpacking risk and reward
• 07:08: Active vs. passive investing explained
• 09:28: Finding reliable resources for beginners

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Tone & Takeaway

The conversation is candid but accessible, using relatable analogies (like the “cat throwing darts” to pick stocks) and cautionary tales to demystify the process of starting to invest. The main takeaway is to approach investing with intention, planning, and awareness—start by identifying your goals, diversify to manage unforeseen risks, understand what level of involvement you want (active vs. passive), and use reputable resources before making decisions.

Listeners are encouraged to take the first step not by buying a hot stock or crypto, but by understanding their own financial path and arming themselves with knowledge before investing real money.

Transcript

[A]

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[B]

Here's your money briefing for Friday, April 23rd. I'm J.R. whalen for the Wall Street Journal. Over the past year, a lot of people have been dabbling with investing for the first time. If you've got some extra money laying around, maybe you've been thinking about doing it too. But there are all sorts of things you could decide to invest in. There's stocks, sure, but what about bonds or mutual funds or even cryptocurrencies like Bitcoin? How do they all work and what risks should you be worrying about? Well, we've got you covered starting today and running all next week. We'll be bringing on the finance experts from the Wall Street Journal's markets team to break it all down. Think of it as a beginner's guide to investing today. How should you even start thinking about investing? We'll discuss the big questions you need to ask before committing your money to any investment.

[C]

I don't think that there's such thing as saying I'm just going to throw a bunch of money in the market and throw caution to the wind. Typically, the way that works is eventually you get a surprise.

[B]

Coming up, our investing editor will talk about the first steps you can take to be a smarter investor and avoid any of those unwanted surprises. That's after the break.

[C]

Access to affordable credit helps me pay my employees, but I don't really need it. Inflation is killing me. But who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill. See banks and credit unions help small businesses make payroll. This bill would cut the vital resources they need while increasing megastore profits. They deserve it, don't they?

[A]

Tell Congress Stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[B]

So let's say you've got some extra money. Maybe you haven't touched your stimulus payment yet. Maybe you just got a nice tax refund. Or maybe you've maxed out your payments to your 401k investment account and you want to take things into your own hands by investing some of it yourself. Where do you even start? Here to Walk us through it is our investing editor, Jeff Rogo. Jeff, thanks for being here.

[C]

Thank you for having me.

[B]

So, Jeff, a lot of our listeners might have some money in a 401k or Roth IRA or a pension fund, or maybe they've dabbled in stocks and they're thinking about becoming more active with their investments. What are the questions they should be asking themselves first?

[C]

Well, I think it's important to the first thing to ask yourself is what am I saving money for? In your life, you're going to have inflection points, you're going to have the maybe student loans you have to pay off and what the due date is of that. You're going to have a home that you will hopefully purchase someday. You'll have a retirement you have to fund. You know, there are, there are these ones, you'll have kids, college. So as you think about you've created a pool of money, you then think about how do I allocate it so that this money can grow for those periods in the most tax incentivized way. I don't think you can invest without those goals. If you don't know what those inflection points are, those points that matter in your life. I don't think it's possible invest. I don't think that there's such thing as saying I'm just going to throw a bunch of money in the market and throw caution to the wind. Typically the way that works is eventually you get a surprise. So a good example of this is last year people were day trading, sort of the rise of the Robinhood and retail trader. And I think what we found this year for the people that traded last year was they got their tax bills and they realized, oh, I have a massive tax bill. All that trading, all those capital gains, a bill comes due. And I think that if there had been some forethought last year while they were training, there's some things they would have done differently. And this sort of speaks to that. If you don't have a plan, surprises will happen. So have a plan to help with that.

[B]

People often talk about diversification, diversifying your portfolio. What does that mean and why is it important?

[C]

Diversification matters because none of us has a crystal ball. So in any year things can run hot and cold. And if you're so focused on one asset class, so all your money's in stocks or even more centrified, all your money is in a tech heavy investment vehicle. What happens if things go bad in that area? A good example of this and the best Example in recent memory I can give you is Archegos. So let's say I had all my money in CBS Viacom. I love the company. I think it's wonderful. I think it's going to surge. They got crushed last month. And the reason it happened wasn't because their fundamentals changed. It wasn't because they got a new CEO. It was because a guy I barely knew existed who runs a hedge fund on another side of the city got a margin call. And that impacted me. There are so many things like that that can happen in investing. And if you don't diversify, you open yourself up to all these risks. Whether it's an other trader, a counterparty at a bank, a changing in geopolitical tides, a pandemic. All of those things upend a market you think you understand. And if you're not diversified, it risks a wiping you out.

[B]

You know, we're talking a lot about risk here and we hear a lot about risk and reward when it comes to investing. What is the relationship between those two things?

[C]

You know, a lot of people, I think oversimplify it a little bit and they think it's sort of a binary thing. Like if I have high risk, then there's a chance for high reward and if I have low risk, there's a chance of lower reward. It's not that simple. If it was that simple, you know, there wouldn't be hundreds of thousands of people that get paid to be financial advisors. Simply put, there are just like there are scorecards of risks and scorecards of reward. Risk can be look at the volatility of an asset you're buying. So if it's something that rises and falls a lot, that's a metric of risk. Another metric of risk is how easy it to buy and sell. How liquid is this asset? There are other products that the risk of their volatility is very low. They typically rise very steadily, but they're really hard to buy and sell. That is a risk factor. Reward is sort of a separate bucket. The reward is over time. What is the likelihood this thing is going to rise and fall? You need to think about what your time horizon is. Is it one year, is it five years, is it 30 years? And that will determine the sort of reward factor. But I think people make a mistake when they think risk and reward are the same coin different sides to it. They're very sort of like nuanced vehicles that you should think in their own independent silo as you're determin whether to make an investment.

[B]

Okay, so one of the big decisions a new investor will have to make is whether to go it alone or to use a professional money manager. And we hear about different kinds of funds that people can put their money in, some of them active, some of them passive. Can you break that down for us, what active and passive means?

[C]

So the simplified version that it's mostly talked about is sort of the difference between a mutual fund and an ETF or an index fund. So a mutual fund, you give money to a fund manager, he or she goes out and picks a bunch of stocks. They're making an active decision to buy Coke versus Pepsi or to buy Walmart versus Target, and you pay a slight fee to this fund manager to make that decision. Passive, you're just, you're investing in a broad index. It could be the entire market, it could be a subset of the market. But the manager isn't choosing between Coke and Pepsi. They're buying both. They're buying broader exposure to the market, and quite frankly, they're charging you a lot less to do that. And so for the last, the big change in investments is over the last 20 years, we've come to realize that most mutual fund managers are just as good as my cat throwing darts to board at picking stocks. And so a lot of money has flown into passive investment vehicles. It's not worth the cost to pay someone to pick between Coke and Pepsi. However, there are some people who think that that may be a bit of an oversimplification. There is still a hedge fund industry that is there to pick win. There are still mutual managers, and there potentially could be ways to pick winners and losers. So I think you should look at your own risk, your own portfolio, and ask yourself, is cost basis the most important thing? The passive managers are always going to win that. If diversification is maybe a bigger thing that you're worried about, there are some markets you simply shouldn't go into without active management. China's a really good example. In some of the more emerging markets, the passive investment vehicles haven't performed as well. So there's just sort of lessons and you should be aware of what these things are and think about what's best for yourself.

[B]

I'm still thinking about your cat picking stocks. America's cat's going to be the new financial whizzes.

[C]

I think so. I think so. I'm not sure it's my cat, but I think someone's cat, possibly.

[B]

All right, so, Jeff, there's a lot of information out there for investors to look into and a lot of options when Building out a portfolio what types of resources are available for people to review before they take the first step in creating a portfolio?

[C]

If you're looking for financial guidance, it really depends on what you need and where you are. I think for a lot of people starting out, they probably have a 401K or a 403B or some kind of retirement account. Start there. Your provider that's holding your retirement money has investor education. Use it. Understand the portfolio that you already have before you take the next steps. The second thing from there is let's say you understand that and it's time for you to start a brokerage account or some kind of investment account. Now evaluate your counterparty. Do I feel most comfortable with the firm that has my 401 or 403? Do I feel most comfortable with the firm I have a banking relationship with, whether that's TD Ameritrade or Bank of America or whoever else? These firms also offer brokerage accounts. One step beyond that for guidance is do I have a larger portfolio and I now need to think about long term tax advantage strategies. Sort of two guides. You can either do the sort of robo route, which is a betterment or Wealthfront or even Fidelity and Vanguard offer these products or do I need a financial advisor? And you sort of have to figure out which of these lanes you are in. But you sort of can't figure out which lane to take until you know which road you're on.

[B]

All right, that's Wall Street Journal investing editor Jeff Rogo. Jeff, thanks for coming on the show.

[C]

You're very welcome.

[B]

So say you've chosen that provider, maybe even signed up for one on the retail trading apps. Now what? All next week we'll be bringing you a special series of episodes. Members of the Wall Street Journal markets team will be here to discuss all sorts of investment assets. We'll talk about stocks, about bonds, we'll talk about gold and of course the current hot topic, cryptocurrency like bitcoin, a little investing 101 before deciding whether to jump in. That's next week on your Money briefing. I'm J.R. whelan. For the Wall Street Journal deal replaces

[A]

fragmented Payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit de L.com WSJ.