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Investment Knowledge Chapter 4

Investment Knowledge Chapter 4

What is Investing?

Investing involves committing money in order to earn a financial return. This essentially means that you invest money to make money and achieve your financial goals.

Investing is different from saving or trading. Generally investing is associated with putting money away for a long period of time rather than trading stocks on a more regular basis. Investing is riskier than saving money. Savings are sometimes guaranteed but investments are not. If you were to keep your money under the mattress and not invest — you’d never have more money than what you’ve put away yourself.

Types of Investments

1. Stocks
2. Bonds
3. ETFs
4. Mutual funds
5. Cash equivalents
6. Real estate
7. REITs
8. Commodities

Stocks

A tiny piece of a company that anyone can buy. Stocks are volitile and while you could make a lot you could also lose a lot. When you pick individual stocks you lack diversification.

How to trade stocks – Online brokerages make trading super intuitive. Generally, you’ll hit a “trade” button and enter the stock ticker symbol and quantity of stock to buy or sell. Some brokerages will ask if you want to trade it right now, at trading day’s end or when the stock hits a specific price.

Bonds

A loan (kind of like an IOU) with interest. They are often issued by governments. Interest rates normally exceed the interest rate of banks however you do assume more risk than a standard savings account. You have all your eggs in one basket if you only invest in bonds.

Real Estate

Involves purchasing real estate such as apartments or houses. There can be a high barrier to entry as property is expensive. Real Estate Trusts allow you to invest in a sliver of property.

How to invest – Directly from a property owner. Real Estate Investment Trusts can be purchased through a broker. Managed portfolios often contain some real estate.

Automated Investing

The hands-free approach to investing. Automated investing allows you to invest in a broad section of the market. It’s advantagious as it comes with diversification and low account minimums.

Things to consider before investing

First things first. Before you start investing in anything, you should ask yourself a couple important questions. These questions determine whether you’re in good enough financial shape to start investing right now — here are the basics:

1. Do you have a lot of credit card debt?

If the answer is yes, you’re probably not in a position to invest quite yet. First, do everything you can do to erase that debt, because no investment you’ll find will consistently outperform the 14% or so APR that you’re likely forking over to a credit card company to service your debt. Here’s a good place to start plotting your debt’s annihilation.

2. Do you have an emergency fund?

In polite terms, poop happens. Layoffs, natural disasters, sicknesses — let us count the ways in which your life can be turned upside down. Any financial advisor will tell you that in order to avoid total ruin you should have between six months and a year of total living expenses in cash, or in a savings account should the unthinkable happen. If you don’t, bookmark this article, start saving, and come back just as soon as you’ve got that emergency fund squared away.

How can I Invest with Little Money?

1. Invest quarters at a time using a spare change app
2. Set up small, monthly transfers from your checking account
3. Use a low-cost investing service
4. Brew your own coffee, invest your Starbucks money
5. Immediately invest any tax returns
6. Invest any raises instead of altering your lifestyle
7. Ask relatives for investing money, rather than other gifts

Understand the risk you are taking

Before deciding where to invest, you’ll need to first assess your personal risk tolerance. This is a fancy way of saying how much of your investment you can really afford to lose. If you need money for next month’s rent, you have a very low-risk tolerance. If your life wouldn’t be materially affected in any way, if rather than investing money, you set fire to it, your risk tolerance is through the roof. Risk tolerance is often dictated by your so-called “time horizon”. This may sound like something you’d hear on the bridge of the Starship Enterprise, but instead, it’s just a term that means the length of time you’ll hold a particular investment.

Invest for the long-term

If you can, invest for the long term. Many studies demonstrate that investors who hold onto stocks for more than 10 years will be rewarded with higher returns that offset short-term risks. That’s not to say this trend will continue, or that risk is ever totally eliminated. Risk never disappears, but you might say it mellows with age.

If you can put money away for a long time period, then you can afford to have investments that are typically more susceptible to rising and falling. Your portfolio can contain a mix of stocks and equities that are typically more volatile compared to bonds.