I first thought up this graphic about five years ago in the shower or a run. New investors kept getting confused about this different terminology and I wanted to show the important “what goes in what” relationship between them. It’s since been copied a zillion times, which is GREAT because it means more people can learn!

Let’s break down what’s in this graphic from the middle out:

• At the core are stocks and bonds. These are the core units of investing. You can buy these things to make money because they pay you while you own them (in dividends or interest payments) and they’re likely to go up in value.
• Funds. Buying a zillion different stocks and bonds is a logistical nightmare, so instead we can buy lots of stocks and bonds inside a FUND. These are things like Mutual Funds, Index Funds, and ETFs. They hold lots of stocks and bonds.
• Accounts. You need to PUT your funds somewhere, and they can’t go in your pocket or your checking account, so you open up an INVESTMENT ACCOUNT. There are different types like a regular brokerage account, a Roth IRA, or a 401(k)
• Brokerage. Your account needs to go somewhere, so you go to a website to open it. These brokerage websites hold your account and let you buy your funds. Popular ones are Vanguard, Fidelity, Schwab, Betterment, Wealthfront, etc.

One question I often get asked is “What’s better, a Roth IRA or an Index Fund?”. And the answer is: “That doesn’t make sense!” You need both. Your index fund goes INSIDE of your Roth IRA (which is held in your brokerage).

As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.

-Jeremy

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By: Jeremy Schneider
Title: The Layers of Investing
Sourced From: www.personalfinanceclub.com/the-layers-of-investing/
Published Date: Wed, 15 Jan 2025 01:48:57 +0000

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