Key Takeaways

• You should invest because investing is a powerful way to grow your wealth. Stocks and mutual funds have historically provided great returns over long periods
• Investing lets you get a piece of the pie. It doesn’t just have to be through the stock market. You can invest in real estate, currency, vintage cars, fine art, and more.
• Before investing there are a few terms to know like stocks, bonds, mutual fund, cash, expense ratio, and price to earnings ratio
• Before investing, you should know or decide how you’d like to invest. There are generally three types of investing styles. DIY investing, passive, and getting an advisor
• Choose an Asset Class that Suits your Risk Tolerance
• Set a Deadline and Choose an Investing Goal: are you investing short term or long term?
• Have a Budget
• Do research on what your Investment Expenses will be 
• There are factors to Consider Before You Start Investing It’s not as simple as “start investing as soon as you can.” Investing is a priority, but there are other financial steps you need to take first. Like having an emergency fund or paying off high-interest debt.

Investing is the act of putting your money to work with the expectation of achieving a profit. With the types of investing that most consumers do, you can think of it as a very well researched bet on an outcome. 

you likely know what the concept of investing actually is. However, what exactly are you investing in? In other words, what are you spending your money on? Well, there are a variety of things you can invest in and a variety of ways to do it. 

Why Invest?

Investing is a powerful way to grow your wealth. Stocks and mutual funds have historically provided great returns over long periods. The money in your savings account is most likely earning you 0.1% interest versus if you invested it in U.S. Stocks, which have a long-term average return rate of 10%. 

Example:

Keep in mind though that in the real world investments go up and down, and they usually don’t deliver smooth returns every year. But in the long run, investing usually grows your money faster than a savings account.

How Investing Works

The economy is usually growing, as a result, the stock market generally goes up over the long run. Technological advancements can improve workers’ productivity and foster new discoveries. These factors help companies sell more stuff and earn bigger profits over time. Investing lets you get a piece of the pie.

The process is as follows:

• You invest by buying an ownership stake in a company (like buying a stock) or loaning the company money (by buying a bond)
• The company sells its products and grows
• Your ownership stake is now worth more, and you can sell it for a profit. Or, the company repays the money it borrowed from you, with interest.

Investing doesn’t just have to be through the stock market. You can invest in real estate, currency, vintage cars, fine art, and more.

Terms to know

Stock

A stock is a share of ownership in a company. It represents a claim on that company’s earnings and assets. Generally, when a company performs well, the value of the stock grows. And when the company doesn’t meet expectations… well, it goes down.

Bond

Buying a bond is lending money to a company or government (federal, state, or municipal). Bonds have maturity dates, at which time you can cash them in and collect interest money. 

Mutual Fund

A mutual fund gathers money from a lot of investors and invests it in assets such as stocks and bonds.

Cash

Yeah, it’s those green papers in your wallet. But in portfolio terms, cash usually refers to CDs (certificates of deposit), money market accounts, or Treasury bills.

Expense Ratio

You’ll see this term when it comes to mutual funds. “Expense ratio” refers to the expenses of owning a fund, including annual maintenance and administration fees, as well as the costs the mutual fund takes on for advertising.

Price-to-Earnings Ratio

When looking at a stock’s fundamentals, the price-to-earnings ratio (or P/E ratio) is one-factor investors look at. It examines a company’s stock price as it relates to its earnings. Classically, you’ll hear people say the lower the P/E ratio the better it is and the higher the p/e ratio the worse it but that’s not always the case. The average P/E ratio is 20-25 when it’s lower than it can mean that earnings are good, or it’s underpriced if it’s higher it means the company could be overpriced, poor performance or higher earnings are expected in the future. There are many metrics when looking to evaluate companies. P/E is only one of many and you shouldn’t look at it when looking at one single company. You should look at it when comparing different companies inside the same industry and sector with similar debt profiles.

Understand Which Type of Investor You Are

Before investing, you should know or decide how you’d like to invest. There are generally three types of investing styles.

1. DIY Investing

1. 1. DIY or “Do-It-Yourself” investing is a more hands-on approach. It requires you to do all of the research yourself. You will also have to keep track of your stocks regularly, which can be time-consuming. On the other hand, it means you have total control over what is in your portfolio.
   2. If you prefer to invest yourself, then find a stockbroker and open a brokerage account. There are numerous stockbrokers to pick from that you might have heard of like Robinhood, Charles Schwab, Vanguard to name a few popular ones but there are many others. After doing research I personally went with Charles Schwab over Robinhood (which most people have because I know sometimes they give you like a free stock from their inventory or something) but after doing research I personally chose Charles Schwab over Robinhood because their free software, in my opinion, is way better and provides you with a lot of data. If you’re interested in the account I opened it’s called a High yield investor checking account and I really like it because Schwab has one of the best ATM fee reimbursement programs in the game, and the fact it has no monthly fees or minimum balance requirements is a big bonus. The account earns 0.03% Annual Percentage Yield; it’s hard to find interest checking accounts, and many with higher yields have monthly fees or minimum requirements. But Schwab pays a reasonable rate with no requirements. Schwab checking offers unlimited ATM fee reimbursements, domestically and abroad. It also doesn’t charge foreign transaction fees, making it one of the very best banks to use if you’re traveling out of the country. However, you can do your research for yourself and pick whatever you like the best. Just make sure you pay special attention to the type of fees if any that these brokers might charge. Once you have an account open, you can  begin buying and selling individual stocks on your own.  

2. Passive Investing

   1. This approach to investing is for people who don’t have the time or interest to do all the heavy lifting themselves. There are a lot of options out there if you want to hire someone to invest for you. You can invest in mutual funds or invest in exchange-traded funds (ETFs) through a Robo advisor.
   2. If you’d rather not be too involved in the investing process, then you’ll probably prefer using a Robo advisor. These platforms do all the work for you, once you’ve answered a few questions about your investing goals and how much risk you want to take. Again make sure you research which places have good Robo-advisors if this is your plan. Also, be on the lookout for limits on what you can invest in with this option. 

3. Getting a Stock Advisor 

   1. The third style is a cross between DIY and passive investing. Hiring a stock advisor or signing up for stock picking services can be a way to pick and choose stock on your own while getting the insight of an expert. You will still need to have your own broker account, but you can leave the time-consuming research to others.

Choose an Asset Class that Suits your Risk Tolerance

After you’ve established which type of investor you are and you have an account set up, either with a brokerage or a Robo advisor, you can start investing! This can be a daunting part of it all. There are so many options out there, depending on your risk tolerance, or how willing you are to lose your money in exchange for a higher return.

Generally, the more risky an investment is, the higher the return is. While it might be tempting to invest in riskier stocks, the best thing is to invest in a variety of different asset classes.  

Asset classes are major categories of investments. They’re building blocks of investing, which you can use to create a portfolio or well-rounded group of investments. An example of a diversified portfolio is investing in a mutual fund, owning a variety of individual stocks across a  number of sectors (like healthcare, transportation, and retail), and also owning and renting out a few real estate properties.

Basic Asset Classes based on how risky they are

• Cash

• • • It’s considered the safest investment because its value is usually steady and unlike stocks and bonds, your cash at the bank is typically insured for up to $250,000, so it’s safe. Even when taking into account inflation. For an easy way to expand your cash reserves, invest in an interest-paying savings account. 

• Bonds

• • • Also known as debt or fixed income. This is when you lend money to a government or institution and are paid interest in return. Examples include mutual bonds and certificates of deposit.
    • Usually, you receive your initial investment back when the bond matures.
    • Bonds don’t typically trade on exchanges, but you can still buy or sell them from brokerages.

• Real Estate

• • • This is when you own physical property. You can also invest in  REITs which stands for Real Estate Investment Trust and own a portion of a property. REIT is a company that owns, operates, or finances income-producing properties however, keep in mind that real estate can be a big-time commitment. 

• Stocks 

• • • Then of course there are stocks. This is also known as equities or when you own shares in a company. This is probably what most people think of when they think of investing. However, keep in mind that the risk of stocks varies significantly by company. Younger companies might be riskier, but a well-established company could also go bankrupt due to unexpected changes or sudden lawsuits.
    • You earn a return if the stocks go up in value-which typically happens if the company’s profits increase.
    • Some stocks even pay dividends-which is a small amount of cash or shares that are distributed to shareholders periodically.
    • Many, but not all, trade on stock exchanges like the New York Stock Exchange or for short (NYSE). Some others trade informally through networks of dealers

• Futures and other Derivatives

• • • This is when you speculate on the future price of an underlying asset. It can be rather complicated, but essentially it’s a contract that obliges the parties involved to buy and sell an asset (such as oil) for a predetermined future price and date.

• Commodities and Precious Metals

• • • just like with real estate, commodities are to own a physical thing — be it gold, or oil. You can trade them, but thankfully, you rarely have to take possession of them. There are a lot of different ways to buy and sell commodities, including futures contracts, or investing in an Exchange Traded Fund (ETF) which is essentially a way to buy and sell a basket of assets without having to buy all the components individually. It often tracks an underlying index like the S&P 500.

• Other Alternative Investments

• • There are also other alternatives like cryptocurrencies, fine arts, or lending to small companies via a peer-to-peer lending platform.

Set a Deadline and Choose an Investing Goal

Now it’s time to determine your financial goals. Ask yourself what are you saving and investing for? How much will you need? If you’re saving for your kid’s college, you’ll need a different amount than if you’re saving for retirement.

Short-term investing

If you know you’re going to need the money in a few years, then your strategy is going to be a bit different. Usually, this is when you buy stocks whose earnings are expected to outpace the market as a whole in a short amount of time. This is also known as growth investing. Some of the short-term investing strategies include investing in a peer-to-peer lender or putting your money in a savings account.

Pros of Short-Term Investing

• High-liquidity.  Your money is not stuck in an account for a set amount of time, making it easy to withdraw the funds when you need them.
• It can be low-risk. Depending on the type of investment, short-term investing can be low risk because it has less time to be impacted by a sudden drop in markets or interest rates.

Cons of Short-Term Investing

• Low-return. Because your money has only been invested for a short amount of time, you’re unlikely to make a big return on your money.
• Higher tax bill. Depending on the investment, you may have to pay more taxes than if you had left the investment in a longer-term account.

Long-term investing 

This is also known as buy-and-hold investing and is probably the most common investment for things like retirement. You know you’re in it for the long run. This strategy involves buying stocks now and holding them for years when they will hopefully be worth more. Other long-term investing strategies include real estate and investing in a certificate of deposit.

Pros of Long-Term Investing

• Less Risky. Holding onto a stock for a long time means you have more time to recover from a sudden dip in the stock market.
• Less Stressful. Longer investments are often less stressful because you don’t need to follow markets as closely on a day-to-day basis.

Cons of Long-Term Investing

• You Need Patience. It takes a long-time to see a good return on longer investments, so you’ll need to be patient.
• Less Control. Because your money is invested for a longer time, it will be a long time before you will see your money again.

Have a Budget

 If you want to become an investor, having a budget can be extremely helpful in saving money to use for investing. When making your budget, be sure to include plenty of funds for investing. This is how I started. I began by transferring money into my savings every time I got a paycheck till I eventually saved up enough where I felt comfortable enough to use a portion of it in the stock market.  

Investment Expenses

Investment expenses which are fees can take a hefty chunk out of your returns. So make sure you’re not getting ripped off. There are many different kinds of fees — everything from account maintenance costs to mutual fund loads. And there are many ways to cut back on them or even avoid them altogether! Every type of investment carries its own set of fees. However, here are the most common fees you’ll see:

• Account Maintenance Fees: Typically, an annual fee below $100. This fee is often waived once you hit a minimum balance in your investment account.
• Commissions: A flat amount per trade or a flat amount plus a percentage per trade. This amount will vary depending on your broker and the funds you invest in.
• Mutual Fund Loads: Either front-end, back-end, or a combination of both. These can sometimes be waived if the funds are held in brokerage accounts with the same broker.
• 12b-1 Fees: Internally charged fees on mutual funds. This will reduce the value of your fund by up to 1% and will be deducted automatically every year.
• Management or Advisor Fees: A fee paid to an advisor who manages your accounts. This could add up to thousands of dollars per year, all avoidable if you manage your own account instead.

Factors to Consider Before You Start Investing

Starting to invest is a smart choice, but it’s a complicated one. Few people have straightforward money situations and opportunities. It’s not as simple as “start investing as soon as you can.” Investing is a priority, but there are other financial steps you need to take first.

Get an Emergency Fund– I’ve mentioned this multiple times in my previous episodes because It’s a huge financial priority to have a fully-stocked emergency fund in an accessible savings account. You want to have three to six months’ worth of living expenses tucked away. Emergencies happen all the time, and having the capital to deal with them is a necessity. You don’t want to have to tap into your investments to deal with a car repair or a hospital bill.

Pay High- Interest Debt – Other financial priorities could include paying down high-interest debt. If you have a debt that has a higher interest rate than your investment return, you’re losing money each day you carry the debt. So it works in your favor to pay down high-interest debt as soon as possible.

Age – Another significant factor is your age. If you’re 30 years old – You’ve got a few decades before you retire. You can play with long-term investments such as stocks that would be too risky for someone on the cusp of retirement. After all, stocks can lose their value quickly, but if you have 30 more years before you need that cash, you can afford to take that gamble. If you’re closer to retirement age – you want to focus on maintaining what you’ve already got. Safer, steadier investments — especially where there are dividends involved — are a better choice for you.

Compound Interest: Time is on your side thanks to compound interest, you are more likely to earn more money the sooner you start investing. Here’s why: Let’s say you’re 25 years old, and you can pull together $5,000 per year to invest. That’s money you may have accumulated from holiday bonuses from your boss and birthday checks. If you were to save $5,000 every year for 40 years, when you’re 65 and ready to retire, you’d have just $200,000. But if you invest that money into something with a 7% annual return, you’ll have made $1,068,048. More than $1 million! If you were to increase your monthly contributions, you’d see even more money when it’s time to retire. While millennials are perfectly poised to take full advantage of compounding, anyone can benefit.

Conclusion

It’s essential to keep in mind that investing comes with a risk, so make sure only to invest money that you know you won’t need in a few months’ time. The stock market can be volatile day-to-day, but you’re more likely to make higher returns in the long run if you invest than if you don’t invest.

You might think that now isn’t a good time to invest because of all of the uncertainty around the coronavirus pandemic.

Instead of thinking about how much value stocks are losing today, think about investing in the long-term. On average, the stock market has a return of 10%. That amount does vary by year and by the type of stock you invest in, but if you diversify your investments and keep investing, you’re more likely to see a better return on your money than if you didn’t invest. And as history shows us, stock prices eventually go up after the crash.

Finance Facts

• Did you know George Washington’s presidential salary was 2% of the U.S. budget? That amount today would be over $67 billion!
• Millionaires who have earned their wealth are moderately happier than those who inherited it, a 2018 psychology study found.
• If you have US$10 in your pocket and no debts, you are wealthier than 25% of Americans.
• The key to happiness is spending your money on experiences rather than possessions, according to studies