The Optometrist’s Guide to Investing 101

Chapter 1: The Basics: The Essentials of Investing and Investing Terms

What is an Investment?


Not an investments:

  • Stocks

  • Bonds

  • Mutual funds

  • Exchange-traded funds (ETFs)

  • Businesses

  • Real estate

  • Hedge funds

  • Private equity

  • Rare materials with high demand relative to supply

  • Currencies, e.g., the Yen

  • Cryptocurrencies like Bitcoin

  • Multi-level marketing (MLM) ventures

  • Your primary residence

  • Vehicles and collectible items, like baseball cards

  • Household appliances

  • Gambling or lottery endeavors

First, let’s delve into the concept of investment and explore its various risk levels, ranging from basic savings accounts to the volatile world of cryptocurrencies.

According to the Merriam-Webster dictionary, an investment is defined as “the allocation of money with the expectation of obtaining income or profit.” In today’s context, the term investment is frequently employed, sometimes to the point of overuse and occasional misuse.

While none of the items under the “Not Investments” side of the chart have intrinsic value as we have defined above, remember that certain items can be used to make money (and subsequently lose money), such as crypto-currency or gambling. However, they do not qualify for our traditional definition of an investment. These items are based mostly on speculation and chance, rather than their ability to generate income.

Okay, let’s start with some basic investing terminology so we can have a solid foundation and understand investing lingo. Don’t worry, it won’t be as bad as neuro-anatomy. 

Ok, let's start with some basic investing terminology so we can have a solid foundation and understand investing lingo.

"Crypto-currency or gambling do not qualify for our traditional definition of an investment. These items are based mostly on speculation and chance, rather than their ability to generate income"

What is a Stock?

A stock represents shares of ownership in a company, sometimes referred to as equity. There are numerous ways to own a company’s stock or stocks of multiple companies. For instance, by purchasing an S&P 500 index, you can share in the profits (and losses) of a specific company, such as Apple.

There are four primary ways to own stock:

 (1) Individual Stock Purchase

Purchasing individual stocks entails purchasing shares of a specific company via a brokerage. This strategy has inherent risks since you’re investing in a single company. This type of investing has the allure of the company becoming the next big success, like trying to find the next Apple or Amazon, but it also has the potential for a downfall, akin to Enron in 2008. Investing in individual stocks demands significant research, staying updated with financial reports and current events, and a higher risk appetite. Most 401(k) plans don’t allow buying individual stocks due to the associated high risk.

Financial Tip

For the majority of investors, both novices and seasoned ones, we advise AGAINST individual stocks  They’re NOT a prerequisite for investment success.  We advocate for low-cost, passive stock index funds as the backbone of their portfolios. Stick to this, and you’ll fare well!  If the idea of picking stocks intrigues you, we suggest allocating no more than 10 percent of your portfolio.

(2) Mutual Funds

Think of a mutual fund as a diversified basket containing a variety of investments such as stocks, bonds, or specific asset classes like real estate or technology.

Some funds even exclusively invest in ethical or environmentally conscious companies. What’s the appeal of a mutual fund? With a single transaction, you get a diverse collection of investments, enabling immediate, effortless diversification. This spares you the task of buying stocks individually. The fund is under the active management of a professional, usually for a fee ranging from 0.25 percent to potentially 2.5 percent.

(3) Exchange-Traded Funds (ETFs)

ETFs are gaining immense popularity. Much like index funds, they are passive and low-cost. Yet they offer a broader spectrum of specific indices, allowing investments in specialized sectors like healthcare. Plus, ETFs can be bought, sold, or traded anytime during market hours, akin to individual stocks. The beauty of an ETF lies in its accessibility. As they’re traded like stocks, investors can buy them at smaller share prices, often below the sizable minimum investments many mutual funds demand—making them an ideal choice for beginners such as optometry students.

Financial Tip

 There is usually an ETF version of popular mutual funds, for example: The Vanguard S&P 500 Index Admiral Mutual fund (VFIAX), which requires a minimum of $3,000, might not be practical for some new investors, so they offer the Vanguard S&P 500 ETF (VOO) which mimics the same return, but can be bought at a per share price.

 (4) Index Fund

Purchasing stock within an index or as part of a mutual fund is typically the safest stock ownership method. We highly recommend cost-effective, passive index funds such as the total stock index fund or the S&P 500 index fund. They’re very affordable, around 0.03 percent, and the average ten-year return for the stock index is roughly 10 percent. Numerous indices exist, tracking everything from technology to real estate. However, the S&P 500 index is among the most popular.

Financial Tip

"The great thing about Index ETF funds is that since it trades like a stock, investors can purchase them for a smaller share price that is often less than the $1000+ minimum investments that many mutual funds require. Great for beginners with minimal cash"

What Is a Bond?

In essence, bonds represent portions of loans given to companies or governments, but are part of a larger borrowed sum. Bond maturities can vary from one to twenty-five years. The borrower, such as the US government, agrees to repay the loan with interest, which is where the profit comes in. The average bond return is about 2–3 percent. Bonds are often low yield and deemed “safe.”

Their primary role? To dampen portfolio volatility during market downturns. Much like the total stock index, we suggest a straightforward, low-cost, passive total bond market index fund.

Next, let's dive into some  Key Financial Terms:

What is an Expense Ratio?

This is the annual charge, usually a percentage, that mutual or index funds impose on investors for management. It covers management and operational administrative costs. This is paramount because it directly affects your profit.  

Remember that this is in ADDITION to a typical financial advising fee (AUM) of 1-2% if you decide to hire a financial advisor.

Example: An actively managed mutual fund can have an expense ratio of 1.80% (or 180 basis points) vs. a passively-managed index fund can have an expense ratio of 0.02% (or 2 basis point).


Financial Tip

"Knowing your expense ratio or total fee cost is is extremely important because it takes away from your net gain. Remember that this is in ADDITION to a typical financial advising fee (AUM) of 1-2% if you decide to hire a financial advisor. Fees matters a lot!" 

What is an Asset Allocation?

Asset allocation refers to the composition of your investment portfolio. Assets can be diverse, from stocks and bonds to commodities like gold or silver. Most investors primarily hold stocks and bonds. For instance, a young investor in their late twenties or early thirties might have 90 percent in stocks and 10 percent in bonds. Stock investments come in varied forms, which we’ll delve deeper into later.

Example: For a young investor in his late 20s or early 30s, his portfolio might be typically 90% stocks and 10% bonds. Stock investments can come in many forms and might be further divided into index stock funds, emerging market stocks, international stocks etc. We will go into more in asset allocation later.

What are Asset Classes?

This is basically a group of investments that are similar to each other and have common trends in the market. The 2 major asset classes are stocks and bonds. Other less common asset classes can include money market, commodities (such as gold/silver), REITs (real estate investment trust). We will primarily focus on stocks and bonds in this guide.

Why Are Low Cost & Passive Stock Index Funds (ETF) The Best Route?

As the billionaire Warren Buffet would say, “By periodically investing in an index fund, the know-nothing investor can actually outperform most investments professionals”

An index fund’s sole objective is to mirror the performance of a market index such as the popular Standard & Poor’s 500 (S&P 500 which tracks the 500 of largest publicly traded companies in the USA). Other indices like the Total Stock Market Index track the entire US stock market consisting of 3,550 companies.

Index funds are essentially run by computer algorithms which are programmed to automatically track the market’s up and down peaks. Computerized robots don’t require the same high salary as wall-street hedge managers, so they are significantly cheaper (or even zero cost like in Fidelity), thus those savings are passed along to you. Statistics show that investors pay nearly 9X more in fees for actively managed mutual funds which charge an average of 0.78% per year, while the average index fund’s cost is 0.09%

 This is a stark contrast to the investment objective of actively managed mutual funds which try to “beat the market’s return” (or try to outperform the SP 500 index). But in order to do that, they need to hire a fund manager to pick and choose the investments within the fund.  The cost of the management, in addition to the trading costs, administration, marketing, etc will essentially come out of your net investments return.

This is why the majority of  actively managed mutual funds will greatly under-perform the S&P 500 index over many years, after accounting for fees and cost of the funds.

Therefore, any investor should choose an index fund which will drastically grow your portfolio over time.

5 Reasons Why a Passive Index fund is the Best

  • (1) Low cost fee ~0.09% (compared to active fund fee~0.78%)

  • (2) Better performance with (near) guaranteed market return

    Research indicates that over a span of ten years, an index fund outperforms nearly 80 percent of actively managed funds when fees are taken into account. The beauty of an index fund is its alignment with the market. If the market surges by 28 percent, your fund benefits. And if it drops by 10 percent, there’s no need for panic as the entire market faces a similar decline.

  • (3) More Tax-efficient

    The low turnover rate within an index fund translates to fewer capital gains distributions. This, in turn, means reduced tax liabilities for investors.

  • (4) Time savings

    Opting for an index fund means there’s no need to dive deep into research, keeping tabs on individual stocks, or monitoring specific companies. Especially for professionals like doctors, time can be more productively utilized, whether it’s attending to patients or enhancing our practices.

  • (5) Less Risky

    Investing in an index fund curtails many potential pitfalls an investor might face. For instance, the temptation to pursue a stock, envisioning it to be the next Apple, is curbed. An index fund inherently diversifies your investment across the market, reducing the risk of concentrating too much capital in a single stock.


It’s essential to understand that financial jargon, akin to terms in eye anatomy, has its unique lexicon. By mastering these terms, you’ll be better positioned as an investor, enabling you to sophisticate your portfolio as you see fit.

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