investing pro tips for beginners


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 gonna 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
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 very 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 going
to happen but having a healthy approach to money and investing can help buy you
better options in life you 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 as 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 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 $2 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 dollars
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 a 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
come for later yes sir 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 and
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 you it’s been a long time since interest
rates for 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 seven years una 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% interest rate your money will
double in six years 72 s 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 them any 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 percent 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 the interest can be your friend especially when compounded but if you
owe money it can be a terrible burden to overcome you 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 rent 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 odd
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 a lower rate than your paycheck
income the basic rate is 15% for most individuals and if you fall into the
bottom two tax brackets your tax on dividends are zero and if you’re lucky
enough to be earning in the top tax bracket you have to pay 20% now for
capital gains in the US 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’ll be considered a
long-term capital gain and will be taxed at 0% for the bottom two tax brackets
15% for the middle brackets and 20% 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 you 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 on as much risk
as you can when you 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 childless 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 you 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 bond is
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 and
atf 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
in the bank it’s an expression of surety or 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 is 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 short term bond issued by the US government which come
in thousand 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 earn 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 you 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
purchase as 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 where people buy
junk bonds it’s a gamble but for some people who have their tolerance for risk
the payoff can be much higher than someone who only invests in low-risk
bonds 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 a
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 3 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 bonds 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 you 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
of 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 10 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 raise their prices people hated the idea and the stock got crushed but when
their decision proved to be smart and subscribed girls shot 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 good researched you
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 you 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 rebalanced 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 fonts 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
ETFs on the other hand are generally passively managed they’re all built to
mimic an 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-priced
talent to pay for some of the largest funds have annual
fees that are a fraction of a percent because they’re 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 ten dollars 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 comm 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 u.s. 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 fees
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 fund 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 your 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 you 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
an excess if you use it for example you may pay $1,500 a year to insure your car
and if you get into an accident you may have to pay the first $500 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 two
categories of in products a particularly complex and
joggin 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 two percent return with a bond or a five percent 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

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