how to invest your money? investing for beginners | advice on how to get started


the concept of investing needs makeover
too many people have the will to invest or the means to invest or both but don’t
start investing for the simple reasons that they don’t think it’s for them or
worse they don’t understand what all the jargon means you work hard for your
money everyone does the difference between just working and saving and
moving to the next level and true financial empowerment is investing and
that’s what this course is all about I want to share with you the importance of
investing what all that jargon means how you can get started and the options for
where you can go to be on your way and regardless of what big financial
companies would have you believe you don’t have to blindly trust a
professional investing isn’t about being a day trader or only for the rich it’s
about understanding the terminology knowing what questions to ask getting
insight into your own risk tolerance and most of all trusting that you can do it
one small step at a time there’s never a perfect time to get started investing so
let’s consider today the perfect day stick with me as we cover the why what
how and where of personal investing basics you here’s a secret about big investment
companies they’re all trying to get wealthy people to move their pile of
money to them that’s why in most retirement ads feature a happily retired
couple at their beachside home for many people this is just too big a conceptual
leap the ideas most associated with investing our wealth retirement interest
and when you’re younger not wealthy and maybe living paycheck to paycheck it’s
hard to imagine what investing could do for you in this video I’m going to
explore a different idea that investing isn’t all about a happy beachside
retirement but instead about buying options in life so what does that mean
options in life mean different things to different people and they are different
to goals your goals may be to get 8% return a year or have $500,000 in 10
years these are good specific goals but they don’t take into account changes to
your life along the way options in life are more about being able to make
decisions to take you in a different direction to the one that you’re on what
if you had an opportunity to move to a different state or country or go back to
school or even start your own business these options in life may cost you in
the short term but may pay back either economically or in quality of life in
the long term adapting your spending habits to prioritize investing can have
a giant impact on your future financial success and for many people step one in
that equation is to save and instead of keeping cash in a bank account put their
money to work depending on your risk profile you have a range of options like
stocks bonds or funds that are highly liquid most can be sold within a day
should you truly need the money and what about if you have no money now great
now’s the time to learn about investing in a truly risk-free way think like an
investor look for opportunities be curious about what’s going on in the
economy and with companies you like the best way to do this is to set up a
virtual portfolio it’s even more interesting when you do this with
friends family or colleagues it’s a great way to learn from each other
especially people who have less investing experience their instincts and
ideas are often different from experienced investors
regardless of where you are in your investment journey think about your
goals not just in terms of a number that you need to retire or things you want to
buy but creating a way for you to buy options in your life a last thought to
leave you with you work so hard to earn your money you go to school you compete
for jobs you jostle for razors and you spend a large portion of your waking
hours dedicated to generating income for you and your family why not make it a
priority to put your money to work for you there are no future facts you don’t
know what’s gonna happen but having a healthy approach to money and investing
can help buy you better options in life some of the more mind-bending economic
and financial concepts are the ideas of compound interest inflation present
value and future value it’s important to understand them as so many of our big
money questions that are fundamentally emotional can be answered clearly with
math I promise I’m not going to make you learn tricky formulas in this video but
I am gonna share ideas on how to think about the relationship between time and
money in a different way first you’ve heard the expression time is money
it’s usually applied to time wasted when you could be earning money or doing
something productive but it’s even more applicable when it comes to investing
let’s start with the idea of compound interest which is basically the way that
money you invest grows exponentially versus in a straight line exponential
growth means that you earn money on the money you’ve already earned to put it in
real terms with compound interest $1,000 invested today assuming a conservative
4% return will be one thousand four hundred and eighty dollars in ten years
two thousand one hundred ninety and twenty years and three thousand two
hundred and forty three in 30 years it’s awesome right but not so fast you also
have to consider inflation in the u.s. a loaf of bread cost 74 cents in 1985 it’s
about two dollars 45 in 2015 so has the value of the dollar decreased not really
but it’s buying power has gone down you get less bread for your dollar and
that’s inflation so let’s play it forward will the cost of a loaf of bread
triple again in 30 years maybe the important thing to remember is that your
money in pure terms will probably be worth less in the unknowable future so
what does that mean to you if you’re using a bank account to save every
dollar you save today that isn’t paying interest higher than the rate of
inflation means that your money will be worth less in the future if you’re
investing however you expect the gains you make through investing to be more
than the effect of inflation so let’s go back to your thousand
today it will buy four hundred and eight loaves of bread or 136 loaves in 30
years now let’s look at the outcome of investing your thousand dollars is three
thousand two hundred and forty three which equals four hundred and forty-one
loaves of bread two more sophisticated concepts are buried in the bread story
present value and future value these are two different ways to think about the
time and money relationship present value is a calculation of what you need
today to get to a specific future goal let’s say I have a goal of someday
buying a boat which by the way is an insane non investment unless of course
you’re a commercial fisherman and that boat is going to cost me an estimated
five hundred thousand dollars first let’s give that some day a date let’s
say in 15 years time and then let’s assume the annual return so historical
stock market returns have averaged about 8% a year but being conservative is
always good so let’s say 4% the present value of the money that I need to invest
today to buy that boat is two hundred and seventy seven thousand dollars so
with two hundred and seventy seven thousand and fifteen years of investing
I should be able to afford my five hundred thousand dollar boat good way to
think of it right it seems a little bit more affordable now so let’s look at it
a different way let’s say I did have two hundred and
seventy seven thousand dollars lying around the future value of that money at
a four percent return is five hundred thousand the future value if I don’t
invest however is two hundred and seventy seven thousand but inflation
will also have an effect on what I can afford with it probably a little more
than a rowboat but certainly not the boat I may have imagined you can apply
the concepts of compound interest and the time value of money to do the math
on other life questions and you don’t need an advanced degree to do them a
pencil in a calculator or even better an Excel spreadsheet can help you make
sense of questions like when should I start to draw down retirement money if I
wait longer to start I’ll get more every month or does it make sense to take the
money early and invest it myself now the answer is unless you know exactly how
long you’re gonna live which nobody knows you need to
maximize your income for later years so postpone taking payments as long as you
can or another question should I reduce my debt payments and use that money for
investing instead the answer is it depends if it’s good debt like federal
education loans then it may be a good idea if it’s bad debt like credit card
then absolutely not pay down your credit card debt first an important question is
when does it make sense to cash in an investment the mathematical answer is
when the average future returns on that money or more than the current
projection of the asset invested but life isn’t that simple and it’s often
not just about reinvesting it just make sure you understand the future growth
that you’re giving up on that money and that the value of what you need the
money for today is greater than what you’ll need it for in the future for
some people it can be hard to get out of the cycle of paycheck to paycheck the
ideas around compound interest inflation present and future value of money can
help you think beyond where you are today and look to a more financially
secure future where your money works as hard as you do remember if you’re just
starting out on your investment journey and you have many years ahead of you
then you have something that the most successful established investors do not
you have time and the sooner you start the better it’s been a long time since interest
rates or 12% but it’s still critical to understand the concepts of interest and
compound interest so let’s start with the definition interest is what someone
will pay you to borrow your money when you put money in the bank for example
you’re essentially loaning the bank your money so that they can lend it to
someone else bonds work the same way when you buy a
bond it works as a loan to the government or company that issued the
bond in both cases the bank government or company pays you interest for the
right to borrow your money the amount of interest you get paid is based on a
number of factors but essentially the higher the risk of not getting paid back
the higher the interest rate this is why the US government loans have a very low
interest rate because they have a low chance of default and junk bonds have a
much higher interest rate because they have a much higher chance of default
let’s look at the impact of interest rates over time interest paid out can
add up which is great but the real beauty of interest is that it can also
be compounding this happens when you earn interest on the interests that’s
already been paid overtime this compounding effect can be considerable
as an example take a thousand-dollar bond paying 4% without compounding that
money doubles after 25 years with compounding the money doubles after 18
years that’s 7 years sooner it’s a big difference to calculate the impact of
compounding a super simple method is the rule of 72 all you do is take 72 and
divide it by the interest rate the result will give you the number of years
it will take to double your money so at a 12 percent interest rate your money
will double in 6 years 72 us divided by 12 it’s super easy the
key to compounding is to make sure interest is reinvested some bonds add
interest to the principle owed and compound future interest payments until
the bond is paid out but many bonds like US Treasury notes pay interest out every
six months unless you reinvest the interest yourself you will not get the
benefit of compounding so let’s flip the coin and look at what happens when
you’re the one who owes money interest is now no longer your
friend interest now gets added into what you owe and compounding can quickly
multiply your debt you can very quickly Oh more than you can manage hai
compounding interest rates on loans are the scourge of the modern economies from
credit card debt to payday loans interest rates can be astronomically
high for example using the rule of 72 a payday loan of 30% will double your debt
in less than two and a half years if left untouched so the takeaway here is
simple never take a payday loan and if you do
pay it off right away and make sure you pay something on your credit card each
month the penalty rates on credit cards are terrible also as homework take a
look at the interest your bankers paying you for the money that you deposit with
them you’re lending them the money so they should give you a fair interest
rate right if your interest isn’t zero it will be close to that now does that
make any sense it’s absolutely not maybe we should start looking at better places
to keep spare cash and we will so in summary interest can be your friend
especially when compounded but if you owe money it can be a terrible burden to
overcome regardless of where you are on your
investment journey whether you’re just learning doing some virtual trading
managing your own investments or you have an advisor managing your money for
you it’s critical that you understand the tax implications I know I know it’s
never fun talking about taxes but my goal with this video is to show you how
to access on investments work so you can make smarter decisions first it’s
important to understand that in many tax systems around the world income
generated from investments has a lower tax burden than income generated from
the hard work you do in your day to day job the theory behind the difference is
that investment money helps to create jobs and therefore should be treated
more lightly than less productive money paid for your labor to show you the
impact of this take $50,000 earned from two people in New York City one earned
the money from working 40 hours a week the other and fifty thousand dollars
from her investment in Apple stock which was up 50% over the years that she held
it for the first person her tax burden which includes all income and payroll
taxes would be about $12,500 for the second person the tax would be $7,500 or
40% lower it’s a big difference before we look deeper into taxes you
need to know that there are three ways to earn income on investments one is
from interest the second is from dividends and the third is from capital
gains interest is what your bank pays you for putting your money in their bank
it’s like when you lend them your money and they pay you interest dividends of
the share of profits a company will pay you to be a shareholder of their company
if you own shares in a company you’re often entitled to a share of their
profits that’s a dividend capital gains is the increase in value of an
investment from the time you bought it to the time you sold it capital gains
can be generated from anything from stocks to houses antiques or even art
now let’s look at how each of these three income streams are taxed in the
u.s. taxed on interest is taxed the same as earned income on your paycheck
there’s no lower tax benefit for interest income
most dividends on the other hand are taxed at lower rate than your paycheck
income the basic rate is 15 percent for most individuals and if you fall into
the bottom two tax brackets your tax on dividends is zero and if you’re lucky
enough to be earning in the top tax bracket you have to pay 20 percent now
for capital gains in the u.s. taxes on capital gains are also lower but only if
you hold the investment for more than one year this is very important to
understand if you sell your investment before you’ve held it for a year the
income will be taxed as ordinary income and will be taxed at a higher rate
if you hold most investments for more than a year it will be considered a
long-term capital gain and will be taxed at 0 percent for the bottom two tax
brackets 15 percent for the middle brackets and 20 percent for the top tax
bracket you need an account of some type to buy and sell investments it could be
a regular brokerage account or you could use a tax-advantaged account
the US government allows you to invest in two types of tax advantaged accounts
tax-free and tax deferred tax free accounts are funded with money you’ve
already paid tax on like money in your savings account or after you’ve paid tax
from your paycheck but once you’ve put the money into these accounts you can
grow them tax-free which means there’s no tax on interest capital gains or
dividends and you won’t pay tax even when you withdraw the money in the u.s.
a Roth IRA is an example of a tax-free account
there are earning limits to these accounts so make sure you earn less than
the limit tax deferred accounts use money that you have not paid tax on
often it’s taken straight out of your paycheck or you get a tax credit on the
money that you put into the account this allows your money to grow without paying
tax on the gains but it is not tax-free you will pay tax on the gains when you
withdraw the money the benefit of this account is that when you do pay tax
you’ll do it when you retire and your tax rate is lower 401ks and traditional
IRAs are examples of these types of accounts it’s also important to note
that these tax deferred and tax-free accounts are built as ways to save for
retirement they’re not built for speculation
so there’s very stiff penalties for early withdrawal so if you put money in
these accounts make sure it’s money that you can put away for the long run and
you won’t touch it until you retire 25 percent of Americans use these accounts
too early and pay hefty penalties so that’s tax it wasn’t too bad was it so I
hope you see that there’s tremendous tax advantages to investing combined them
with the idea of compound interest you now see why it’s more important to
invest versus just save your money before we start talking about how to
actually invest we need to set some guideposts you won’t know where you’re
going unless you have a map so let’s build a map that you can use to invest
on your own or guide you through what an advisor will do for you first of all you
need to know yourself you should not invest in products that run counter to
what you believe in or have a higher level of risk than you can tolerate you
need to know what you’re investing in and be a hundred percent comfortable
with it but first you or your advisor needs to
do an assessment of your objectives your life stage your risk tolerance and your
current financial situation the next concept on our map is risk with every
investment there is a danger of losing money in order to be successful every
investor has to gauge and manage risk sometimes it’s fairly easy bonds for
example are rated by third parties so you can easily determine the risk of
most bonds stocks are more complicated but here’s a few pointers first assess
value if you’ve ever purchased anything of value in your life you can determine
the value of an investment you look at price quality what others say about it
track record and history in the end if you think the investment is cheap you
buy it if it’s expensive you avoided finally you need to assess potential
reward oftentimes reward works inversely with an investments risk profile a junk
bond for example has a poor rating because of its high risk of default but
the interest paid by junk bonds is usually quite high if you’re willing to
take a risk a junk bond can pay handsomely but in the worst case
scenario you’ll lose some money but even with all the information in front of you
you may still not pick a good investment even professionals have a hard time the
Center for Applied Research at Tufts University found that of 2,046 mutual
funds they tracked from 1976 to 2006 the number that beat the market after fees
one percent yeah one percent so even with all the information in the world
even professionals have a hard time beating the market so what should you do
do your research but also trust your instincts be curious
about the world around you and if you see something that you like act on it
when I saw the first iPod it blew my mind
I bought the stock in that day talk to friends look at your credit card
statement where do you spend money start at home and look at the companies you
love then assess risk value and potential return but having said all
this you should also manage your risk carefully if you’re novice investor you
shouldn’t take on too much risk risk is a recurring theme with investing always
keep in mind that you should invest in things that reflect your tolerance for
risk your experience and the time you have to iron out any mistakes you might
make so with the map in front of us we can move on to you and figure out what
kind of investor you can be setting goals is a vital step for every
investor but when I hear investment companies ask what’s your retirement
number I cringe how much do you need to retire they
asked my answer is as much as humanly possible but in my mind they’re asking
the wrong question you should never set a target until you
take a good look at who you are and what your needs are once you do that you’re
gonna learn what kind of investments you should make and how much risk you should
take on only then can you begin to set goals so let’s look at you and begin
with your investment objectives objectives may sound like the same thing
as goals but they’re slightly different your objectives should be a general idea
of what you want to get out of your investments do you want to generate
income that you can use to live off do you want to grow your savings base for
later or do you want to grow as quickly and as much as you can or do you want to
make sure you don’t lose any money in your investments these general
objectives will guide your investment decisions
next how much risk are you willing to take on if you don’t want to lose any
value in your investments you probably have a low tolerance for risk and if you
want fast growth then you’re okay with the prospect of losing money you
probably have a high tolerance for risk your objectives and risk tolerance can
sometimes run counter to each other if this is the case you need to reconcile
them if you want to speculate but you have a low appetite for risk you should
adjust your objective to aim for moderate growth if you like the high
returns that come from taking a risk but you’re scared to death of losing money
you need to move away from making high growth your objective so make sure your
objectives and risk tolerance match now let’s look at you from the outside these
are life related self assessments that must be taken into consideration when
you’re setting your goals to do this you should ask yourself a few key questions
in fact every registered investment advisor is mandated to do the same for
every client the first question is your experience level this one’s
straightforward if you’ve never invested before you should start off slowly and
not take on too much risk next look at your time horizon
this one’s not as straightforward there’s a lot of debate about how much
risk you should take on as you get older here’s my position take
as much risk as you can when you’re young because you have time to make up
for mistakes when you near retirement evidence shows that keeping a higher
level of risk pays off because you have so much more to invest retirement
doesn’t mean you stop investing so don’t cut your risk too much unless you just
can’t tolerate the risk another question to consider is your financial situation
if you have debt and little savings you shouldn’t take on too much risk you
literally can’t afford to lose money if you have little or no debt and some
savings you can take on more risk finally your family situation should
also influence how much risk you take on if you have a family you need to be more
conservative to protect the savings you have especially for things like health
care and education so now let’s look back at your objectives again you need
to modify your objectives to match your self-assessment if you’re inexperienced
have some debt and have a family you need to be very conservative with your
investments to protect your savings if you’re young and child lists you have
experience have a little debt and disposable income you can take on a
considerable amount of risk so you may have noticed that we don’t have a goal
or a number we just have a general idea of investment objectives and a risk
profile that’s great now you can build a portfolio to match your objectives and
risk profile in the meanwhile here’s a goal for you save as much money as
possible based on your objectives and tolerance for risk and this is only one
part of a bigger picture you should also think about budgeting and debt reduction
things that will help you save more in the end you’ll generate savings and
these will help buy you options in life and your future will thank you for that one of the hardest things about
investing is getting started and one of the things that stops people getting
started is understanding what all the words mean in this video I’m going to
cover the five basic building blocks of investing I’ll start with simple
low-risk products and move up the scale to more complex higher risk products so
let’s start with something simple cash cash is the easiest thing to
understand because we use it every day generally you give your spare cash to a
bank and you earn interest if you’re lucky these days banks pay terrible
rates of interest but in the u.s. they guarantee deposits of up to two hundred
and fifty thousand dollars so it’s safe but not strategic you can invest in cash
equivalents also known as money market accounts or certificates of deposits
also known as CDs or t-bills these pay slightly higher interest rates than your
trustee savings account but you can’t move money in and out of them easily
like a bank account for something that has better returns but more risk let’s
look at bonds most people are probably familiar with savings bonds bonds are
also called fixed income instruments they’re essentially a loan you make to a
third party for which you get paid interest there’s a vast range of bonds
available they range from essentially risk-free bonds issued by governments
all the way to super risky junk bonds issued by companies the rule of thumb
with bonds is that the higher the risk on the bond the higher the interest rate
you’ll be paid one of the nicest things about bonds is that they’re all rated by
bond rating services so you can very easily look up how risky that on this
the fees on bonds are also generally super low usually a transaction fee to
buy and sell them the next investment category you can put your money into is
stocks also known as equities or shares a stock is literally ownership of a
piece of a company so if you own a common stock of Apple you are an owner
of Apple and as an owner you’re eligible to share in the company’s profits
through dividend payments you also have shareholder voting rights and because
stocks are traded in public markets the value of the stock changes so if you
invest in a good company and the value of the stock goes up you’ll be able to
sell your shares for more money than you bought them for giving you a gain on
your investment the cost of holding stocks is just the cost of buying and
selling them usually just a few dollars finally it’s important to note that
historically US stocks have averaged a real 5% annual rate of return in the
20th century the next investment category of funds there are funds that
you buy and sell just like a stock on an exchange called ETFs
these are exchange-traded funds some are built to match a specific index like the
S&P 500 for example in fact for every share of an ETF there exists a basket of
stocks of that targeted index the beauty of an ETF is that they can reflect a
specific index so if you want to match the overall return of the market and
ETFs perfect you won’t beat the market but you certainly won’t underperform
either and they are for the most part low cost you have to pay a fee to buy
and sell ETFs just like stocks but on top of that you have to pay a fee as a
percentage of what you own for large funds this can be low sometimes less
than a tenth of a percent but for smaller more exotic funds fees can hit
2% or more but overall ETFs can be a powerfully low-cost low effort way of
getting into investing mutual funds have traditionally been a very popular way to
invest they operate differently than stocks and ETFs they’re not traded on an
exchange so you have to go directly to mutual fund companies to buy and sell
them most people with retirement plans will
own mutual funds the big point of difference to ETFs is that mutual funds
are usually actively managed so they have experts who buy and sell holdings
to take advantages of changes in real time but one of the big problems with
mutual funds is they charge a lot of fees because there’s people managing
these funds who need to be paid after their fees have been taken out of your
investment it can be quite difficult for you to beat the market you may also have
to pay a sales fee or load there’s ample evidence to show that the promise of
extra gains that mutual funds promise because of active management are not as
true as investors are led to believe the final area
I need to mention is the world of alternative investments these are
annuities whole life insurance products private placements and hedge funds for
people getting started I recommend they stay away from these investments most of
them have heavy fees are offered by non fiduciary standard providers and many of
these products are not liquid meaning they’re difficult to sell they’re
difficult investments to understand and manage and often do not provide enough
return to cover the cost for people getting started with investing on their
own I recommend getting familiar with stocks bonds an ETF so step one and for
investors working with an advisor I recommend steering away from complicated
products as they usually come with complicated fees and to make sure your
advisor is very clear how much the different investments are costing you you know that expression it’s like money
in the bank it’s an expression of surety or of guarantee a sure thing as a
reference to safety the expression works well money in the bank is very safe even
if your bank gets robbed or goes bust in the u.s. the government will guarantee
your deposits up to two hundred and fifty thousand dollars that’s a lot of
safety but what about using bank accounts as a way to invest I’ll cut to
the chase and tell you straight out that money held in bank accounts is a
terrible investment idea between fees and low interest rates keeping money in
the bank is a great way to not make money cash in the bank is great because
it’s safe and easy to get out this easy to get our part is called liquidity you
can access your money by ATM cheque wire transfer ACH bank teller PayPal carrot
card venmo your money easily flows everywhere
it’s called liquid but because banks pay such low interest rates right now you
should keep only a minimum amount of money in your bank account try to keep
two to three months of expenses in the bank this will give you enough cash to
weather any bumps in the road and have a large enough balance to avoid annoying
bank fees if you can manage to save more than two to three months of expenses you
should think of moving extra money elsewhere if you have money that you
don’t need right away but you still want to keep it safe and relatively liquid
you could look at cash equivalents these are investments that pay better
interests and savings and checking accounts while still offering the safety
and liquidity of a bank account the first level of cash equivalents is a
certificate of deposit a CD these are bank deposits with fixed terms if you
know you don’t need your extra cash until let’s say you begin shopping for
the holidays you can put that money in a CD that matures on November 30 for
allowing the bank unrestricted right to use your cash for those few months
they’ll give you a better interest rate the only problem with CDs is if you need
to get your money early you can get it but you’ll be charged a penalty a more
favorable place to park your extra cash is in what it’s called the money market
the money market refers to a market that trades only in highly liquid short term
investments some of these are available to small investors such as the US
Treasury bill which is a type of show term bond issued by the US government
which come in 1000 dollar denominations these can be bought through a bank or
through a broker another way to access the money market is through money market
accounts at your bank money market accounts take your deposit and invest in
short term investments you have to ask your bank if they have a money market
account if they do they should be paying you slightly higher interest rates than
a traditional deposit account one last word on cash deposits if a bank talks
about annual percentage rate the APR they’re referring to the rate of
interest you get paid on your deposit but it’s just as important to know how
often the interest is paid if it gets paid out frequently you’ll then own
interest on your interest earning you more money so make sure your interest is
paid out more than once a year at the moment bank deposits offered
depressingly low interest rates and with the price of goods rising the money you
leave in the bank actually buys less and less over time so it’s really important
to look at other places to put your money how would you feel if I told you the
only way you could buy a house was it if you paid for it entirely in cash it’s
hard to imagine right and that’s why loans exist loans make big important
purchases possible this is essentially what a bond is a
loan that you make to a company or government so they can finance large
projects in order to do this they issue bonds government issue bonds which are
also called government notes or bills are considered quite safe cities states
and federal governments all issue bonds with rare exceptions governments always
pay back their bonds when a government fails to pay its bond which is called a
sovereign default its impact to world markets is quite severe so it is avoided
at all costs some government bonds are also tax free so if you fall into a high
tax bracket a tax-free bond can be used as a way to earn income without having
to pay tax on the interest corporations also issue bonds many large
international companies issue bonds as a way to fund expansion or build new
products or move into new markets large well-known companies rarely default on
their bonds and they’re considered quite safe smaller less known companies also
issue bonds these bonds are much more speculative and risky for this reason
they’re generally called junk bonds they aren’t as their name implies garbage but
they do default much more frequently and a much higher risk than higher grade
bonds at this point we should talk about risk the great thing about bonds is that
there’s independent third parties that rate bonds they do sometimes make
mistakes but overall the two main rating agencies Moody’s and Standard & Poor’s
are very good at giving you a rating for bonds anything above a triple B for
Standard & Poor’s or B a a for Moody’s is considered investment grade or the
most risk free of bonds the ratings reflect risk and should definitely be
examined before you purchase a bond lower rated bonds definitely have more
risk but they also pay more interest this risk premium is why people buy junk
bonds it’s a gamble but for some people who have the tolerance for risk the
payoff can be much higher than someone who only invests in low
Bonz but we want the key word here is could taking on excessive risk could
also lose your money pricing of bonds is fairly straightforward every bond has a
face or par value this is the value of the bond when it was issued every bond
also has an interest rate that it pays which is called the nominal yield or the
coupon rate so a $1,000 par value bond with the coupon rate of 4% will pay you
$40 a year bonds also have a maturity date the date at which they pay back
their principal one more thing you need to know about bonds is that they
fluctuate in value bonds are traded in secondary markets and they often do not
change hands at face value the present value of a bond is driven by both supply
and demand and by external economic forces especially inflation I’ll give
you an example of how this works let’s say the US economy is booming and
there’s a shortage of all sorts of things and as a result prices rise this
is inflation everyone gets nervous including the banks to cool off
inflation and slow the economy the Fed raises interest rates and interest rates
throughout the economy rise but not on your bond you’re holding a bond that has
maybe a two percent yield and it’s gonna stay at two percent but new bonds are
being issued at three percent coupon rate so no bonds gonna pay full value
for your two percent bond when the same price they can get a three percent bond
so in order to sell your bond you have to sell it at a discount this is how the
secondary market for bonds work as a rule of thumb as the interest rates rise
the price of existing bonds drop and as interest rates fall the price of bonds
go up the last thing you should also take note of what a bond is backed by
bonds can be backed by land buildings equipment securities or just a promise
generally it’s better if your bond is backed by something tangible
but for bonds issued by super-strong corporations or governments a promise is
usually good enough many advisors will put bonds into your portfolio to balance
out risk or to provide you with ongoing income adding bonds to your investment
strategy yourself as ez government bonds are usually available through your bank
other require a brokerage account but these
are easy to set up and the purchase of bronze is extremely cheap if you have
extra cash bonds are a great alternative to cash in the bank if you had a choice to invest in real
estate Gold bonds or stocks which option
historically has given the best return it stocks hands-down through thick and
thin the US stock market has returned 5% even after depression dot-com bubbles
economic meltdowns stocks still have the best returns over time of all asset
classes so let’s look at stocks and see why they have traditionally been such
good investments first let’s start with what a stock is stocks also called
equities or shares own ownership stake in a company when you buy a share you
actually become an owner of a small percentage of a company as a owner you
get certain benefits which vary depending on what kind of stock you own
there’s two types of stock you can buy first two common shares these are by far
the most widely used form of stocks they give the shareholder the right to vote
at shareholder meetings and a right to a share of the company’s profits if the
company offers dividend payments common shares are traded on stock markets and
have prices that fluctuate depending on supply and demand and market forces
preferred stocks are a different class of shares they’re also an ownership
stake in a company generally preferred stock pays a higher dividend than the
common stock of the same company and their payments are fixed and predictable
typically a preferred stocks value is driven more by the dividend at offers
than by the company performance this means that preferred shares don’t
move up and down in price as much as common shares because preferred shares
are based on regular dividend payments they behave more like a bond than a
share regular income and relatively stable value with all shares the key to
being successful is by correctly managing its price prices of stocks go
up and down you want to buy a share when the price is low and sell it when the
price is high this gain is called a capital gain and you want that number to
be as big as possible the key to doing this successfully is by correctly
assessing a stocks inherent value at any moment in time a stock’s price is not a
perfect reflection of a stock’s value it’s essentially the unlocked potential
the stock if you can find a stock with lots of unlocked potential and buy it
the price of the stock will rise as the value is unlocked I’ll give you an
example the day Apple launched the first iPod the stock price was the equivalent
of $1 22 at the time Apple stock looked expensive but now Apple stock costs over
hundred times that was Apple undervalued on that day absolutely
but who was to know how well Apple was going to do did anyone know the iPhone
was coming or the iPad no but the iPod contained the seeds of massive untapped
potential for Apple so just like buying any product you want to calculate the
value in a share and this is the holy grail of Wall Street and I can tell you
this right away there is no perfect way of measuring value but I’ll also say
this you can do it you have the skills to find value in stocks and this is
where you start where does your money go what products do you love what products
your friends talking about what was your last aha moment when you bought
something truly breakthrough what will the world look like in five years or ten
years and what companies will be the market leaders of that world these
questions all form the basis of stock valuation and the difference between the
price of a stock today and your perception of where it will be in the
future will determine whether the stock is undervalued or overvalued and you
want to buy the undervalued stocks and sell the overvalued stocks a bonus is if
you find a stock that you love but others hate an example is Netflix when
they moved from DVDs to a digital model and raised their prices people hated the
idea and the stock got crushed but when their decision proved to be smart and
subscribed girls showed up the stock soared the lesson here buy from the
pessimists and sell to the optimists and this is the value of stocks as an owner
of a smart company you can and should benefit from their smart ideas and the
growth that these ideas create finally you’ll need a brokerage account to trade
stocks the brokerage market has been democratized to a great extent fees on
transactions are only a few dollars per trade now most brokers have
researched you can tap in for free it’s a little complicated to open a brokerage
account it’s also known as a trading account and you’ll have to answer a lot
of questions but it’s well worth the effort a company can grow from a
start-up in a garage to a multinational conglomerate within a single generation
no other asset class can do that and that’s why stocks can grow like no other
asset class and that’s why it’s so important that you learn about stocks
and make them part of your life for the long term remember the words of Warren
Buffett the stock market is a device for transferring money from the impatient to
the patient if you need a bit of help investing you
might want to leverage some experts Wall Street is full of them and funds are a
great way to do it first of all funds are pulled stocks or
bonds which are put together to attain an objective these objectives can be
anything from generating income to investing in gold to matching the
movement of a specific index these objectives are contained in a prospectus
which is an overly complex but important document so make sure you check the
funds objectives to make sure it matches your own the best thing about funds is
that they’re created by experts they’re either actively managed where the funds
holdings are constantly rebalance to match objectives or they have passively
managed where the fund is expertly set up and allowed to run on its own either
way you get the help of an expert funds also allow you to do things that
you can’t do with a single stock or bond because they’re pulled investments you
can get the advantage of spreading your investment amongst various different
holdings which allows you to access more opportunities as well as spreading your
risk across more investments there’s two types of funds mutual funds and
exchange-traded funds I won’t go into the structure of one versus the other
but they are different the most important structural difference is that
ETFs trade freely on an exchange and a mutual fund is bought or sold after the
market closes directly with the issuer of the mutual fund there’s definite
differences between mutual funds and ETFs generally mutual funds are actively
managed this gives you day-to-day confidence that a smart person somewhere
is working to make sure your investment is well taken care of
ETF’s on the other hand are generally passively managed they’re all built to
mimic at asset index and once they’re set up they run on their own mutual
funds also have the benefit of low minimum investment sizes and automatic
and free dividend reinvestment where any income generated from your mutual fund
is automatically reinvested into shares of the mutual fund mutual funds also
give breaks in fees for higher levels of investment ETFs have the benefit of
price because they’re passively managed you don’t have a lot of high price
talent to pay for some of the largest funds have annual fees that are a
fraction of a percent because they traded like a stock on an exchange you
also have to pay a broker like Schwab or a trade to buy and sell those ETFs but
these should be less than $10 per trade in the US you also need to be aware of a
cost called the spread which is the price between what the buyers and the
sellers are willing to pay big spreads increase your buying price and reduce
your selling price but these can be reduced substantially if you stick to
the more popular highly traded ETFs search out the fees and spreads on sites
like ETF calm before you buy an ETF mutual funds are generally actively
managed and require you to pay for some of that high-priced talent an expense
ratio is an annual fee that pays for this talent the average fee on a US
mutual fund in 2013 was one point two five percent of your investment and you
pay for it year after year even if the fund goes down in value it may not seem
like much but if you make a 5% return last year you’ll have to give a quarter
of your profit back to the mutual fund company in-phase and added to this a
loads these are commissions paid to brokers
when you buy or sell a mutual fund through brokers banks or insurance
agents these can be as high as five or six percent there are no load funds but
they too can charge a fee as long as it’s less than 0.25 percent per year I
can’t stress enough how worthless these fees are they are sales fees and do not
pay for the experts who run the funds these fees are worthless and should be
avoided at all costs so how about performance first of all there’s no
evidence that a fund that charges a higher fee ostensibly for better advice
generates higher returns added to that even with experts behind you the fees
for an actively managed fund will on average give you lower returns than the
overall market so the bottom line if you buy and hold a few select funds for the
long term and don’t trade them too often etf see your answer if you have less
than a thousand dollars to invest or have a 401k with limited options and
no load mutual fund may be a better option if you’re working with an advisor
or someone who’s buying on your behalf be careful that they aren’t putting you
into high-cost funds or funds that hold assets that you may fundamentally
disagree with so that’s funds this market has really
expanded in the last decade and there’s now some fantastic low-cost options out
there if you do your homework and avoid fees funds can be an excellent option
for your portfolio in the world of investing the basic
building blocks are cash and equivalents stocks bonds funds and insurance
it seems the odd one out is insurance products but bear with me
insurance is much more than just what you buy to cover your car house or life
there are insurance products that have all the dimensions of an investment
product and should be considered as such first most types of insurance are an
expense not an investment you pay a premium to get the insurance and often
in excess if you use it for example you may pay fifteen hundred dollars a year
to insure your car and if you get into an accident you may have to pay the
first five hundred dollars as costs but the insurance company will pay the rest
it’s pretty straightforward right the insurance company decides how risky you
are to insure and they do a whole lot of math called underwriting on how much you
should pay the essence of underwriting is the same with insurance based
investment products the two main products will cover our whole life
insurance and annuities when people think of life insurance it’s usually
term life term means that you pick a period that you want to be covered for
and if you die before that time is up your beneficiaries get paid if you don’t
die before that time is up you get nothing
whole life has both an insurance contract which will pay a stated value
when the insured person dies as well as an investment component that grows in
value that the insured person can withdraw or borrow against annuities
where the fixed or variable are insurance products that you pay into
with the intention of the annuity paying out when you’re older a fixed annuity
means that you’ll be paid the fixed rate of return every year until you die which
imagine you set yourself up for a thousand dollars per month annuity in
1990 by 2020 $1,000 a month may be far too little to live on a variable annuity
on the other hand has much more flexibility for payouts that can work
with inflation but they can also be higher risk the critical things to
consider if you’re buying either whole life insurance or annuities other terms
the fees and the risk these categories of investment products are
particularly complex and jargon filled so make sure you know what you’re
signing up for and paying for because they both deal with the most emotional
question of all the when am I going to die question these can seem like great
products to protect yourself should you live for a long time
make sure you benchmark these products against simpler products that may or may
not have higher rates of return and ask the critical questions how much
commission are you being paid to sell me this what are the annual fees when can I
access my money what are the tax implications variable annuities in
particular have been growing in popularity recently and with good reason
they earn huge commissions for the people who sell them so as with all
investment products do the math carefully on what you need to put in
who’s getting paid and what is your expected return and not just on the
product in isolation but in the opportunity cost of not being able to
put that money to work elsewhere if you can get a 2% return with a bond or a 5%
average return from equities and ETFs with the money you’re putting into
insurance products potentially earn more elsewhere as with everything it comes
back to risk and what level of risk you’re comfortable with you investing is risky there’s always a
chance that your investments will lose value you may buy stock in a mining
company hit by a lower commodity prices or maybe a retail company overburdened
itself with debt and can’t pay its obligations or maybe an older company
gets crushed by innovative competitors there’s always a chance that a stock or
a bond will lose value and some of your hard-earned money will vanish but
there’s also a chance that your investment will increase in value and
that’s why people invest the risk to your investments can come from countless
sources but the end result is the same loss of value you work hard for your
money so you should keep as much of it as you can if you want to avoid risk
there’s actually something called the risk free rate of return for investors
this is the 10-year US Treasury note the government of the u.s. guarantees
payment and has never defaulted so this is the benchmark for no risk investment
but it is also one of the lowest returns available right now it returns a
fraction of a percent a year your return is guaranteed but your return is
minuscule and here’s the rub if you want higher returns you need to take on more
risk so how do you measure risk for bonds it’s easy to measure a third party
rates every bond so you can look at the rating and easily gauge risk the ratings
reflect the chances that the bond issuer will pay the interest they state and
return your principal for stocks and funds it’s much harder to gauge risk the
value of a stock is determined minute by minute by buyers and sellers in a market
there is no set formula to the value of a stock it’s all about supply and demand
and what someone will pay at a single moment in time there’s a belief that the
market is rational and it prices in all available information but if you watch
the price of stocks bounce around it’s hard to imagine that this is true
there are analysts who rate stocks and some a good at gauging risk but for any
single stock there’ll be dozens of different opinions as to risks so it’s
difficult to figure out what the risk really is added to this a risks that you
can’t avoid these are called systemic risks or market risks which impact
entire Muppets these are usually large events like fun
or meltdowns or acts of war which tend to hit all markets hard
these are unavoidable but if you can hold on through these downturns stock
markets have always rebounded just hold your breath or if you’re on the higher
end of the risk scale a downturn can be a great time to buy but picking the
bottom is extremely difficult to manage your risk you need to do several things
first is to do your research know what you’re buying and do your best to find
untapped value in whatever you invest in also you need to know how much risk you
should take on because stocks are riskier than bonds the general rule of
thumb is the younger you are and the more experience you have the greater
proportion of stocks you can hold should stocks experience a downturn you’ll have
the time and experience to write it out unfortunately there are risks that will
pop up that you will not be able to avoid a product recall maybe or a
lawsuit things that surprised all investors risk can be both your friend
and your enemy in investing without taking on some risk it’s impossible to
get good returns the issue is knowing your risk in being secure in the risk
you’ve taken risk in itself is not bad an educated risk is what you’re after
and will reward you in the long run managing risk is one of the most
important jobs you have when you’re investing one key way to do this is to
spread your risk among different investments by putting your eggs in
different baskets you are balancing your portfolio and lowering your overall risk
balancing your portfolio is also a way of reflecting your own risk tolerance as
you know markets go up and down but these ups and downs are uneven and
unpredictable when one part of the market goes up others can go down when
stocks go up bonds can often go down even on the same news the impact can be
different and different kinds of investments are just more volatile than
others what you’re really diversifying against is non systemic risks these are
things like bad management product recalls drops in commodity prices and
changes in regulations that hit individual companies industries and
countries differently diversification is the best way to protect yourself against
non systemic risk you can do this in three ways diversified by asset class
geography or industry the most important area of diversification is by asset
class when you invest you can buy stocks bonds funds or just hold cash it’s
always a good idea to have a mix of all of these stocks tend to be more volatile
and risky bonds tend to be much less volatile and more stable stocks and
bonds also tend to move in opposite cycles so most portfolios balance
between stocks and bonds in order to manage risk this is where you tie in
your personal objectives and risk tolerance if you have a conservative
risk profile it would be good to hold more bonds and cash and a lower
proportion of stock if you can accommodate a lot of risk you can hold a
greater proportion of stock as a guideline this is what a sample of a
balanced portfolio should look like a conservative investor could have a mix
of 70% bonds 20% stocks and 10% cash for an aggressive investor the holdings are
inverse 70% stocks 20% bonds and 10% cash you can also diversify by geography
by stocks and/or bonds from different parts
of the world you can spread your investments across the US Europe Asia
and the developing world by segmenting your investments this way the drop in
the ruble or a meltdown in Asia will impact only a portion of your portfolio
finally you can diversify by industry many industries run in cycles so by
diversifying by industry you’ll make sure your entire portfolio doesn’t hit a
down cycle at the exact same time for example by investing in both mining and
manufacturers low commodity prices will hurt mining but benefit manufacturers if
you start with broad categories such as primary industries manufacturers and
services you can branch out into more specific categories once you get the
hang of it it should be noted that ETFs can be an excellent low-cost way to
diversify your portfolio you can find ETFs that are diverse affine by
geography industry or asset class a single fund can do a ton of
diversification work for you especially when you’re building your first
portfolio one last thing to mention it’s always good to go back and revisit your
balance every three months the value of your holdings will change over time and
make sure to check if you’re still in balance and if you’re not you rebalance
by selling some of the asset where you’re overweight and putting it into
the assets where you’re underweight some investment companies even automate this
for you with a simple checkbox so that’s balanced it’s easier than it looks
start by diversifying between stocks bonds funds and cash use ETF to do some
easy diversification for you aim to diversify even further by industry or
geography if you can and if you do it well even if one part of the market hits
the rocks your overall portfolio won’t be impacted severely and that’s the goal
of balance making sure a downturn in one part of the market doesn’t ruin your
whole portfolio gauging the value of an investment is a
single most important goal of investing if you find an undervalued investment
and buy it and hold it while the rest of the world jumps aboard it can be a
fantastic experience your goal is to buy the undervalued companies and avoid the
overvalued ones so how do you gauge value that’s literally the
million-dollar question so the goal of your search for value is to find
undervalued companies the bargains the companies with prices that are too low
or have an underappreciated new product or companies that are misunderstood or
just not well known essentially you want to find a company that has a potential
to grow but is inexpensive to buy to do this start with what you know begin at
home or at work with companies that you spend money with if you love them your
friends talk about and they have a new product that blows you away and you
can’t live without them start digging into them see if they’re publicly listed
companies and if they are start looking into their numbers which we’ll do in a
second but try to find companies that you know and love if you’re a loyal
customer you’ll make a terrific shareholder – then you may actually get
paid for your loyalty so let’s dig a little deeper into value the most
important number you need to look at is PE or price to earnings ratio it’s the
number which best reflects the current value of a company this number shows you
how much investor money your money it takes to generate one dollar of company
profit if the PE is 100 it means for every $100 you invest in a company that
company can generate $1.00 of profit historically
average PE s have been around 15 to 17 for US companies so 100 means the stock
is extremely expensive but what if the company is growing like crazy maybe a
hundred PE makes sense because its profit is growing to take that into
consideration you can look at something called a PEG ratio this divides the PE
by predicted growth so a P of a hundred for a company expecting to grow 100%
next year gives you a peg of 1:1 is great 1 or less is actually exactly what
you want so now the company doesn’t look so expensive the next thing you should
do is compare a company to its peers most financial sites like
yahoo finance lets you compare financial numbers between companies compare profit
margins cash flow from operations and debt to equity ratios between companies
or against industry averages this will allow you to see the company’s
performance out in the market look for dividends at the company or pay this
will produce income in your pocket usually every three months and also look
at what Wall Street is saying Yahoo Finance will allow you to see analyst
ratings ranging from a buy to a sell rating if you see positive buy ratings
it will be a good double check on your value assessment finally be aware of
earnings dates every three months companies must report their numbers a
company called Thompson first call will usually post Wall Street’s expectations
for the company and it will come up in searches for news on that company the
stock will usually move after its earnings report but not in response to
the earnings news the stock will move according to how close they were to Wall
Street expectations missed expectations usually result in a drop of the price of
the stock beating the expectations usually means a bump in the price so
circle earnings dates in your calendars they’re important verifications of the
accuracy of your value assessment just like when you exercise your regular
muscles your money muscles can be strengthened over time with practice and
training first your money muscles are just an analogy for your risk tolerance
but risk tolerance sounds so inaccessible we’re gonna stick with
muscles think of when you went to the gym or went for a run for the first time
in a long time you feel fine until the next day when everything hurts the pain
comes from the tiny tears in your muscles as they repair themselves and
get stronger investing doesn’t necessarily cause physical pain but the
very act of using your money muscles and making decisions for yourself helps
build your money muscles and your risk tolerance one of the hardest things with
investing is taking your first steps you can only build your money muscles over
time by learning what that feels like to you some of the best investors I know
started out very risk-averse even saying they preferred to keep their money in
their mattresses but learned that they could get over their risk aversion by
making small investments or even virtual ones with the understanding that they
had to be ok with it all going away now it’s rare to completely lose your money
with investing unless you buy high and sell low so seeing that one week your
$1,000 is worth 1,200 and the next week it’s worth 900 you start to realize that
unless you’re in the lowest risk fixed income products like bonds your holdings
will fluctuate but the key is that over time an amazing thing happens your
investments will changing value but your ability to tolerate those swings is your
money muscles at work so what are a few questions that you can ask people to
help speed up your process learning about investing can be done anywhere you
never know who can help so first if you’re talking to someone that seems
knowledgeable ask them if they invest other people’s money for a living or do
they invest their own money or do they have someone do it for them those three
categories of people will have very different points of view some that
should be taken with a grain of salt if you’re trying to build your own money
muscles if it’s a professional you have the opportunity to ask big strategic
questions but remember there’s no future facts no one really knows what’s going
to happen in the market even if they act they do so I start there ask in all your
years of investing how does this year compare and what do you think is going
to happen next year and then ask what do your clients expect of you in terms of
returns and what’s the last thing they bought with their own money and what’s
something that they’re thinking of buying for themselves if a non finance
person invests their own money you’ll be getting a great view of that person’s
risk tolerance and investment strategy ask them how they got started what was
their best in worst moment as an investor what’s their point of view on
the market right now and what are they interested in buying
or selling next last if a person has someone invest on their behalf ask how
their portfolio performs net of fees versus the market ask him how much they
pay and if they’re happy with the cost versus returns of outsourcing and ask
what is the best piece of advice their broker or advisor has given them by
asking the right questions to the right people you can accelerate your learning
understand your own risk tolerance and build your money muscles over time so you have money to invest you have a
plan you know your goals you know your risk profile you know what you want to
invest in maybe you’ve already begun the journey and invested your hard-earned
money now what how will you know if you’re doing well how do you even begin
to measure success first of all it’s super important to go back to your
objectives did you want to be cautious and preserve the money you have or did
you want to go all out and generate huge returns the performance of your
portfolio needs to be seen in comparison to your objectives you also need to look
at what you’ve invested in if you invest in conservative government bonds you
should not expect outsized gains your performance needs to be compared to the
kinds of investments that you’ve bought so let’s start by measuring gains first
of all there’s a big difference between realized gains and unrealized gains
realized gains are investments that you sold for a profit the gain called a
capital gain in most parts of the world is taxed until you sell there is no real
gain and no tax it also means you can’t really brag about your huge gains until
you realize them by selling to figure out your gain take the money you get
from selling the security and subtract it from the money you paid for it that’s
your game if you want to know the percentage game take your gain and
divide it by the amount of cost you in the first place now multiply that by a
hundred this will give you your percentage gain it’s a good overall
picture of your game but it doesn’t tell the whole story your game should also
include any dividends or interests you get from your investment add those and
then subtract any fees and then do the calculation again then take out what you
expect to pay in tax and do the calculation again this will give you a
complete picture of your actual gain to keep track of day to day changes you
should track unrealized gains keep track of each individual investments purchase
cost and its current value also keep track of any fees as they come up and
add them to the cost of the investment this may be difficult to do for funds
that charge fees over time it’s so super important to do this you
need to see how much fees take away from your games also add up all your
unrealized gains and losses and it’ll give you a sense of how well your
overall portfolio is doing if you need help
there’s many sites online that will do the tracking for you for free but it’s
super important that you track it over time what’s a different way of measuring
success you really need to compare yourself to how everyone else is doing
it sounds a bit crazy and it is but let’s think about it for a second if
your stocks went up 5% last year but the overall market went up 20% you didn’t do
so well but that 5% would be terrific if the overall market went down 5% so
context is important compare your stocks to stock markets and your bonds to bond
averages to see how well you’re doing in the US the S&P 500 is considered the
best proxy for the overall stock market so compare your stock returns to that
index bonds are more predictable so unless your bond issuer defaults your
returns will be known the final thing to watch is when to sell watching the
performance of your stocks should give you sell information if you’ve made
terrific gains on a stock you should consider selling some of it to lock in
the gain or to get out entirely don’t be too greedy if a company’s stock drops
because something is fundamentally wrong with the companies such as restated
earnings or lawsuits or plummeting sales it may be time to bite the bullet and
sell at a loss always have an exit strategy so that’s how you measure
progress you should look at it as often as you can and as carefully as you can
making sure you incorporate all costs by watching your progress you’ll close the
loop in your investing journey giving you feedback to help you make good
investing decisions you just like there’s many asset classes
where you can put your money which as a protip asking investors how they
diversify across asset classes is a pretty great way to start a conversation
there’s many ways to get started in the actual buying process one thing that’s
important to know when you’re getting started with opening investment accounts
is that there’s no one right way to start it’s up to how comfortable you are
with the different options and if you talk to very wealthy people a great
thing that they can teach you is that diversification is key they will have
different types of accounts for different purposes for example they may
have an investment banker that manages family money with the goal of long term
growth a retail brokerage to make investments on their own for shorter
term gains an advisor that manages their college funds and trusts for future
generations and a low-cost online advisor to get their kids started rain
the main types of accounts available are wealth management accounts which is for
high net worth individuals traditional financial advisories retail brokerages
an internet-based low-cost advisors each of these come with different fee
structures and ways of working but two concepts to get familiar with are the
ideas of custody and discretion custody is when your custodian manages your
account for you whether the custodian has discretion is a big deal discretion
means that they can buy and sell on your behalf without your approval obviously a
benefit of this is that there’s very little effort and time required by you
let’s go back to the four options of accounts private bankers also called
wealth managers generally have custody and discretion good ones will share what
they’re doing but they don’t often need their clients approval to buy and sell
on their behalf for their services you usually pay two percent of your money in
fees often with extra trading fees on top two percent doesn’t sound like much
but remember it’s every year and if your portfolio is making five percent growth
it’s important to know if that is before or after fees most wealth managers have
minimum account sizes it’s usually in the millions for big global firms like
Goldman Sachs and usually between a hundred to 250,000
for smaller wealth managers so let’s go back to the non richy-rich options
regular people can have financial advisors and for people with complicated
financial lives I highly recommend them my personal preference is for fee-only
advisors so you know that for a set amount every year you’re getting
attention hidden fees and incentives for advisors can eat away at your money so
be sure that you understand upfront how much you’re going to pay and whether
your advisor needs your approval to buy and sell on your behalf retail brokerage
accounts like TradeKing and Schwab in the US have neither custody or
discretion as an account holder you are known as a self-directed investor you
pay only when you trade the last category of low-cost internet-based
advisors a new entrance to the financial world basically replacing human advisors
with algorithms a Robo advisor provides very low cost advice on what to buy and
are a great way for beginners to get into the market when you open account
with any of these options expect to answer a lot of questions Advisors have
a fiduciary duty to act in your best interest so they’ll ask a lot of
questions around who you are and your appetite for risk brokerage companies
will also ask questions around your employment and whether or not you seem
to be laundering money but as long as you’ve got nothing to hide you’ll be
fine to put it in perspective to open an account with any of these and transfer
money from an existing account to get you started should take you less time
than watching an episode of The Simpsons or you could even do it while you’re
watching TV this few things in life that can make a bigger impact on your
long-term financial success than starting investing early if you’re
thinking about doing it forego one 30-minute TV show and get started there’s never been a better time to
build your own investment portfolio at low or no cost however there’s a far
greater cost involved in investing than fees or cost per trade it’s the cost of
not knowing what you’re doing and letting fear or emotions drive your
decisions so what does do-it-yourself mean the official financial industry
term is retail investors it doesn’t mean that we buy retail stocks
it means we’re buying ourselves through a broker think of the different asset
classes from real estate to bonds or art to funds most investments that you buy
have a middle person involved a broker and stocks bonds funds and cash
equivalents and no different even if you’re buying and selling yourself you
generally can’t go direct to your local Stock Exchange and buy for retail
investors the most inexpensive route to market is through a retail broker like
Schwab or trading in the US or sac so in Scandinavia or monix in Japan these
companies will usually only charge a cost per trade so if you’re a buy and
hold investor which I strongly recommend then the actual cost of being an
investor on an annual basis can be very low let’s do the math let’s say you have
a hundred thousand dollars to invest lucky you and in the course of the year
you buy and sell ten times doing your investing yourself will cost you about a
hundred dollars using an advisor who charges two percent of assets under
management each year to buy and sell the same amount will cost you over two
thousand and it’ll cost you that two thousand dollars or two percent of your
assets every year so when does doing it yourself make sense
first the earlier you start the better the best way to learn is by doing and
the best time to do is when your financial life isn’t overly complicated
start with the virtual portfolio or spend a small portion of what you plan
to invest and give it some time to make yourself comfortable if you have someone
taking care of your money for you why not set aside a little yourself and see
how you do in comparison the key to getting comfortable is understanding
your own risk profile and how you feel about games on
losses as well as being able to not panic or get emotional about watching
your numbers go up and down which they will every day or you’re also considered
a DIY investor if you open a Vanguard account pick a target date retirement
fund and contribute to it over time and don’t touch it to a retirement this
passive approach may not teach you much but given their low costs there’s a good
chance you’ll come out ahead versus paying someone else to invest that money
for you a few things to watch for as you manage your own investments first taxes
remember you don’t make or lose money until you actually sell an asset or you
earn interest or dividends your brokerage will send you the relevant tax
form so make sure you include gains and losses in your tax return in the US
capital gains taxes work differently depending on how long you hold a stock
for and if you buy and sell that same stock within a year you’ll pay your full
income tax rate but if you hold for longer than a year and then sell that
drops to 20% or less depending on your tax bracket this can mean significant
extra dollars in your pocket another thing to watch for is fees a good rule
is that the more complicated in investment is to understand the more
likelihood it has hidden fees mutual funds were once the darlings of the
investment world until lower-cost ETFs came along if you’re buying mutual funds
make sure you understand the fee schedule before you press buy and
volatility can make a retail investor think that they need to be more active
in the words of Jack Bogle who’s the founder of Vanguard when times of
volatile he advises you to don’t just do something stand there activity benefits
everyone in the financial ecosystem who makes money on transactions but buy and
hold has proven to be a much better do-it-yourself strategy in the long term
it can take time and effort but the rewards can be significant for as long as there’s been money
there’s been people who charge a fee to hold it or manage it for you the world
of financial advice is a vast and complex one and it can be hard to know
where to start when you decide you want some help if you have a complicated
financial life with property children different assets
perhaps a business maybe some debts and a complicated budget an advisor may be
just the thing you need to bring order to your investments first thing consider
your goals what problems are you looking to solve is it to save you time across a
variety of financial issues is it to grow your nest egg is it to help you
budget and save your goals we’ll then narrow down the different types of
advisers that are right for you remember an investment advisor is not necessarily
a financial planner the difference is that an investment advisor is focused on
growing your assets and a financial planner is focused on the spectrum of
your financial life from insurance to trusts to budgets if it’s the latter you
want look for someone with a high certification level such as a CFP which
is a certified financial planner in the US remember an advisor is neither an
accountant or a lawyer you still need those people in your life
one extremely important thing for anyone who presents themselves as an advisor to
you is to ask what credentials they have the main thing to find out is if they
are bound by fiduciary duty to you this means that they must act in your
best interest versus theirs you know those people who try to get you to buy
higher interest CDs when you go to the bank they have no fiduciary duty to you
their goal is to get your money out of your savings account and have it
committed to the bank for a fixed term the question are you a fiduciary very
quickly separates the advisors from the salespeople the next thing to consider
is their cost structure I strongly recommend working with a fee-only
advisor that way you know exactly how much they’re being compensated many
advisors work on an AUM model which stands for assets under management they
look at the total amount that they’re managing for you and take
percentage every year so measuring your advisors progress against your goal when
working with an investment advisor is simple make sure they outperform the
market by at least the value of their fee every year and not as an average so
let’s say your investment advisors charge us a standard 2% AUM meaning that
if you give them $50,000 they will take a thousand dollar fee every year and
let’s say the market in the last five years has gained eight percent every
year that means your advisor has to consistently deliver 10 plus percent
growth to justify their 2% fee otherwise you’ll be better off putting that money
into a fund that tracks the market so at least you’re getting an average return
or doing it yourself now when times are good it’s easy to
point fingers if things aren’t going well the true test of a great advisor is
how they protect you when times are bad if the markets down 8% and you’ve stayed
flat or lost less than 8% then they’ve done their job which is why the most
important questions to ask an advisor is how has my portfolio performed net of
fees in comparison to the market and don’t be afraid to ask questions like
how much in total are you being paid for servicing my business and also don’t be
afraid to negotiate you’ll set yourself up as a client that needs attention as
someone who’s willing to negotiate is probably someone who’s willing to change
advisers if they aren’t getting the returns and the attention they need one
last thing what if you don’t have the money to invest right now and just need
help with budgets insurance and debt reduction for example financial planners
can be very helpful here in setting you up with a plan however one thing an
advisor cannot do is make you change your spending habits which in my opinion
has a giant impact on future financial success up until recently there really was only
two options in managing money doing it yourself or outsourcing it to an advisor
in the last few years thankfully things have changed consider first the four
main elements in how to make a choice on how to invest your money its time costs
risks and returns now risk and returns are a function of what you choose to
invest your money in from higher risk higher potential return stocks to lower
risk lower potential return bonds the time and cost factors are two things you
now have much more control over let’s start with time if you’re getting
started ask yourself this important question do I want to be educated on
what’s going on with the market and with my investments or would I prefer to set
it and forget it there’s no right answer but be forewarned if you choose the set
and forget option what’s your pain tolerance for checking in on your
balance and seeing that it’s down by 20% would you panic and sell to cash out
what remains or would you stick with it and wait for the cycles to turn if you
don’t have a base level of knowledge that markets are cyclical you may be
more likely to panic and sell at a loss so how much time is reasonable for you
to learn enough to understand what’s going on and to understand when you need
to take action I personally don’t think there is a set amount of time it’s more
about taking notice of the right things in the world and being curious about the
things you don’t understand but setting aside an hour or two during the week or
on the weekend to keep your own financial affairs in order and check in
on your investments is a pretty great practice costs on the other hand are
pretty clear if a hands-on advisor charges 2% to give you individual advice
it stands to reason that a digital version of that advisor should be
cheaper right the new generation of digital advisors are called Robo
advisors here’s how they work every client has to share the same information
that you would share with a traditional advisor including your income goals risk
profile instead of a human making decisions about what’s best for you a
digital platform usually run by an algorithm doesn’t and instead of 2%
these Robo advisors you we charged between 0.25 and 0.75 percent
well under half the cost of a traditional adviser the benefits beyond
the lower cost are usually that they have great online tools for you to
easily see where you are and access to a great range of products usually low-cost
ETFs companies like motif do a great job of providing a range of investment
options by theme so you can invest according to your interests at low cost
recently bigger players like Schwab have come up with their own Robo options read
the fine print carefully though sometimes they have restrictions like
the percentage of your account that you must hold in cash and that can impact
your long term success like with anything look carefully into these
options to see the value that they’re really providing if a Robo advisor is
just repackaging a bunch of ETFs from Vanguard and then charging 0.35 percent
on top just buy the Vanguard ETFs directly the wave of innovation in
financial technology is just beginning and it’s going to be great for investors
it’s well worth researching more options in this space as ways to get you started you the world is filled with options on
where you can invest your money from real estate to art from funds to beanie
babies well maybe that last one isn’t technically an asset class there’s no
one right way to get started with investing or optimizing the investments
you have regardless of asset class but by taking the time to learn more about
stocks bonds and funds and being curious about the wider economy and the
opportunities within it a great first steps the road to financial empowerment
is a lifelong journey it starts with being able to budget and save to set
goals and to put money into investments to achieve those goals
understanding the foggy terminology is critical to for example being a trader
is very different to being an investor the first is all about short-term gains
and a high level of activity investing is about setting your goals
choosing assets that you believe will grow and optimizing for the long term
despite what the motivational speakers of the world may say there are no simple
five-step solutions to financial empowerment there’s no shortcuts you
need to do the work but take it from me who learned everything from scratch
while having a demanding day job it’s not that hard to dig deeper into
terminology and to answer questions you may have
investopedia is a great site which also have a terrific virtual portfolio tool
they also cover more advanced concepts like REITs and options or hedge funds
concepts that are good to know about for beginners should stay away from mint is
a great resource for budgeting and goal-setting tools with some great
content for general personal finance daily worth has a great mix of articles
and access to a directory of financial professionals I use Yahoo Finance to
look up specific company information and Nasdaq comm has great general
information and maka watch comm is great for news investigate that is all about
educating the individual investor it’s a great neutral resource as unlike most
websites they’re not trying to sell you anything and that is key to look out for
while you’re on your search for knowledge everyone is trying to get the
money from your pocket into this I believe that with the right tools and
education anyone can be a confident investor why
not you you

One comment on “how to invest your money? investing for beginners | advice on how to get started”

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