investing 101, investing overview, basics, and best practices
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 most retirement, adds 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 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 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, 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. 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 gonna 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. And 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 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, learning 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%. 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, 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 owe more, than you can manage high. 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 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. You. 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 avoid it, finally. You need to assess potential. Reward, oftentimes. Reward, works inversely, with an investments, risk profile, a junk. Line 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 their 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 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 heavily if you're a 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 objective 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 risks 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, an experienced, 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. 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 gonna 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 tea 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 know 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 ETF 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 at 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 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 up 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-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, where 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 going to stay at two percent but new bonds are being issued at three percent coupon, rate so, no one's 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 broke Brij 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 good research 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, 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 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 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 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. 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 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 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 adversity, in. Distri 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 under way, some. Investment, companies even automate, this for you with a simple check box 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