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Concepts of Investments and Risk

Merry Christmas! Everyone!

I want to share a gift of knowledge with you. In relation to your Christmas futures. It is vital to learn how to invest in our future. Everyone has heard, as I’m guilty of saying as well, to save money for your future retirement. But the problem is, how do I invest it? How does it grow? What do I invest it in?

I would like to answer some of those questions here.

What’s the basics to investing?

First, knowing the Time Value of Money is valuable. The idea is, if you’re investing a certain amount of money every year for retirement, and you can assume it’s growing at an average rate, then how much money will you have to retire?

We utilize the Time Value of Money to calculate how much we need to save to reach our goals.

Vital to our tool belt is what Inflation is: The rate at which our currency is becoming less valuable. My Grandpa was telling me the other day about how at the store you could get a king-sized candy bar for a nickel. Nowadays the larger candybars are usually a dollar, or at a gas store a buck fifty. That’s inflation. If Inflation is growing faster than your money, then your investments aren’t doing to great.

What do people mean when they say an investment is riskier or safer?

Investment Risk, is the likelihood your investment will give a loss or less return than expected.

Many will say that a Bond is a “safer” investment than a Stock. An individual bond has a ‘guaranteed’ rate of return. This is because a Bond is debt, with required payments from the company who’s bond you own. A stock is in the market of that company, and will rise and fall as the companies valuations change.

If you’re only invested in one stock, you are in a risky investment. It isn’t necessarily true that bonds are safer. With some bonds, you have Inflation Risk, which is the risk that inflation will be greater than your return.

Safe investments are made when in conjunction with a Risk Tolerance, Financial Timeline of the investment, and proper diversification.

What is Risk Tolerance and Why Would It Affect My Investing?

 

This is an extremely generalized table of risk tolerance.

 

 

Younger Aggressive (1)

When we are younger we can subject ourselves to a greater risk with our long term investments, why? Because we’re young and if the stock market dips 30% in a year we can just wait till the market rebounds because you’re not retiring for 30 more years.

The basic concept of stocks and bonds for investing is to slowly overtime convert more of our investments from Stocks to Bonds and Cash to protect what has already grown. It’ll keep growing in a Bond, but at a slower and more predictable rate. This also helps to create a base level of guaranteed type income, (which can be supplemented with Pensions, Social Security, and Annuities also)

The ratio of Stocks to Bonds is called Allocation.

If Stocks are more jumpy, why invest in them at all?

The average return in the stock market since 1900 has been roughly 10.4%. Bonds have averaged somewhere between 5-6%. That is the basic reason why. Bonds, due to being debt instead of part of the companies growth are more guaranteed.

Why not 100% stocks then?

If someone is going to say “I’ll give you 99% chance of getting 5% more when I pay you back next year” you’re likely to love that when the contrasting option is “I’ll give you a 60% chance of being worth 10% more, and a 40% chance of being worth 10% less next year”. That’s the fundamental difference.Younger%2F Aggressive (2).png

When you’re closer to retirement, if too many of those coin flips become the negative ones you can see your retirement savings drown, and not recover for 5 -10 years. Well, when you’re retired and you need to spend the money this year. You start spending the money at that 10% drop or 20% drop.

Its good to have some in both, it gives you many baskets. If one basket drops, or has a bad year, overall lots of your eggs get safely there.

How Do You Step Into That Risk In The Stock Market?

Diversification is what allows investing in stocks to not be as risky, and can create reasonable believe that money will grow consistently over a long time period at a rate higher than most bonds.

The Market has a Beta of 1. This means that The market itself is 100% connected to itself. If a certain Stock has a beta of 2, then it’s expected to usually go up two dollars for every 1 dollar The Market goes up. If another stock has a beta of .3, then it’s expected to go up thirty cents per dollar the market goes up. This also is good because when the market goes down, it only goes down thirty cents per dollar.
Now, beta’s of stocks aren’t facts, but general trends that change over time. Having stocks in many different areas of The Market, allow for diversification.

If you want to get deeper into Allocation, Read some of Dr. Craig Israelsen’s work, the 7-twelve portfolio. It discusses 7 Asset Classes, and Twelve types of Stock’s and bond’s to be invested in. (That’s a lot of baskets to put your eggs in)

Where Do I start? Should I Buy Apple and Google Stock?

As a general rule, It’s extremely simple to get diversified by investing in a cheap ETF.

ETF stands for Electronically Traded Fund. These funds take an asset class such as Real Estate, Small Growth Company, or the entire S&P 500 series of 500 stocks and automatically invests a certain percentage of the fund into the different stocks that are available within their parameters. If you invest in their ETF, for a very small fee, they automatically keep the fund in par with the Market that it’s tracing.

When your money is in multiple types of ETF’s and perhaps a few stocks of companies you like, you have made a simple diversified portfolio. Some ETF’s even trace Bond’s, so you can get a healthy helping of bonds in their also. Any ETF that has Vanguard running it should be the cheapest type of ETF available. Vanguard is all about low cost investments.

How much growth should I expect in my savings?

It’s safe to expect growth, but how much growth? Most planners will not argue with me to say that though many will use numbers from 6%-8% that 6% is a reasonable expectation to have, if invested properly. This also depends on your risk. If you’re more heavily in bonds, you can expect it to be lower, if you’re more aggressive in stocks you can expect it to be a little bit higher.

What Questions do you have about investments that I haven’t answered? Send them to me at [email protected]  Or leave them in the comments below and I swear I’ll answer them!

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“Safe” Investments: What You Need To Know

The 8th Wonder of The World.

ae-quotes
Albert knows his stuff

Money is pretty cool right? And knowing that compound interest is the 8th wonder of the world, (Thanks Einstein for that gem) we usually turn to dropping our money in the bank.

Problem is, that money makes next to zero doll-air-oes. Back in the 90’s when interest rates with in the 12-14% it was safe to put money in a CD at 10% interest. Today, interest on a 3-year CD is puny, 1.4%. Interest rates are down 90%, which is good for inflation and other things, but makes me think, “What do I do to grow my money?

Numbers

First: let’s talk numbers. I conducted a survey and found that most people struggle with knowing where their money can grow, and what’s riskier or not.

Problem: “What tends to have the highest growth over periods of time as long as 18 years”

A. Checking Account
B. U.S. government savings bonds
C. Stocks
D. Savings Account

What is your answer?

I’m glad to say that not a single person put Checking Account. I’ll still explain that for a moment, a Checking account is what I classify as “Cash & Cash equivalents”. It’s liquid, it’s being used day-to-day, and mine currently has a return of .02%. This isn’t where money goes to grow, it’s where a money goes to be spent.

B. U.S. government savings bonds. These investments are usually given a pretty small interest rate, and are guaranteed by the government. I was actually quite shocked by just how many people thought that this was the best place to grow money! These are given a guaranteed return, but usually is equal or less than what inflation is.

D. Savings account. A few people thought this was a good place to grow money. Savings accounts are similar to Checking Accounts, in the fact that they have very poor growth rates, usually higher than Checking, but still very low. In my mind, they are basically a way to keep your money in 2 seperate locations so you don’t spend it all. I think there are better ways to organize money, but that’s just my thoughts.

C. The Stock Market. This is where money goes to grow. Naturally there are risks, but there are many ways to mitigate the risk. Diversification, Allocation, and having a good time horizon for investments helps. With an 18 year time frame, and being diversified across many stock types, this is where money will grow.

Lets look at the data

I looked into typical rates for Savings Accounts, Checking Accounts, Government Bonds, Corporate Bonds, and the Average Stock Market Yield. Here is what $1000 dollars looks like over a 20 year investment.

growthof1k
Chart by TheFinancialGinger – 2016
www.nerdwallet.com/rates/checking-account – Zion’s Bank Checking Account
www.nerdwallet.com/rates/savings-account -Zions Bank Savings Account
www.treasury.gov/resource-center/ – Government Bonds
finance.yahoo.com/bonds/composite_bond_rates – 20 year AA corporate bonds
http://www.moneychimp.com/features/market_cagr.htm – Stocks average from 1995-2015

Looking at this, some people are probably shocked. Know that Stocks have the risk of going down, they will go down and up. Greater Risk often yields greater upside potential.

Fine, I’ll put it in stocks. How do I do that?

If you have $5000 or $10,000 to invest, put it into the stock market. There are some great places to open an account online.

TDAmeritrade has a pleasant platform that is excellent for beginners and isn’t too expensive to use at $10 per trade.

OptionsHouse is an online broker that has $5 trades and has no minimum balance.

TradeKing is another online broker that has $5 trades and no minimum balance.

My absolute personal favorite is Vanguard. The reason for that is they are all about the idea of buy-n-hold with stocks, and stock-packages called Mutual Funds or ETF’s. The idea behind that is simply buying a preset group, then waiting and letting it grow over time.

If not, you can probably talk with your Bank, Credit Union, or find a good local individual company such as EdwardJones to get you started. Make sure that if you use a broker/dealer company that you know the cost associated with it.

In Summary

Checking accounts are where money goes to be spent. Savings accounts are for emergency funds and money to be used within 6-12 months. Bonds are where money grows safe but small, and the stock market is where money belongs for long-term growth.

So, open an investment account and invest! Don’t let $5000 extra dollars be left sitting for no reason in the bank.

 

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4 Basic College Money Skills: How To Master Them

College always walks up and says: “Gimme money”. It’s the worst bully since Billy who always took your quarters during recess in 2nd grade!

Here are some amazing articles I’ve read about college kid money skills.
1) Getting Scholarships for school
2) avoiding Debt in College
3) how to deal with CC’s during College
4) how to start a savings account, and basics on opening an investing account

Basically, this is a really good reference and resource of some other writers work about the subjects. Feel free to comment extra resources you’ve found that are good too! I’ll make sure to update your research into this list also!

The Basics of College:

http://wellkeptwallet.com/2012/05/how-to-graduate-college-without-any-debt/

This article gives 5 basics: 1) Consider the Cost, 2) Work During School, 3) Apply for Scholarships, 4) Work for the University, 5) Be Radical – Try Crowdfunding! Thank you Deacon Hayes for this article!

https://wallethacks.com/money-tips-college-students/
Jim Wang gives one of the best and most concise run downs on 40 basic money tips in college.

Financial Advice To Start Your Military Career

I honor Doug, whom started the Military Guide. If you want to or do serve in the military, Doug knows the finances behind it.

Get The Scholarship

Jocelyn from TheScholarshipSystem shared her site, and I highly recommend it. The Best article she has, which is a freebie if you join her email list, is “The 3-Steps I Used To Write Reusable Scholarship Essays QUICKLY and That Won Me Over $125k”
http://thescholarshipsystem.com/ – her article The 10 basic steps to getting scholarships
http://thescholarshipsystem.com/ – 5 things to update on your FAFSA (Right NOW!)

 

KristinaEllis.com hosts Kristina’s books about how she paid for college “Confessions of a Scholarship Winner” and “How To Graduate Debt Free”. I met Kristina in person and FinCon16 in San Diego and would recommend her books to anyone who is serious about getting scholarships in college.

I can’t rant enough about Brynn Conroy and the wonderful FemmeFrugality site. These tools are great to understanding the mindset of applying for scholarships.

http://femmefrugality.com/how-to-write-a-successful-scholarship-essay/

http://femmefrugality.com/playing-the-odds-on-scholarship-opportunities/

http://femmefrugality.com/why-a-scholarship-resume-is-an-important-part-of-your-college-arsenal/

Hear the Ginger

Can you handle the Ginger? Be the first to get my newsletter by signing up here! :3

Avoid The Debt

Robert Farrington, a friend of mine, gave me some articles he wrote about avoiding debt and investing during college. This article is about 6 people in different situations, and how they avoided student loan debt. http://thecollegeinvestor.com/15182/6-college-graduates-share-avoided-student-loan-debt/

Jason Butler gives you the run-down on TextBooks and cutting costs here. http://thebutlerjournal.com/2013/08/09/saving-money-on-college-textbooks/

And how about the cost of an apartment? LaTisha Styles from StylesTV shares how to deal with an apartment here, https://www.youtube.com/watch?v=7UEn_k0DNb8

Credit Cards in College

http://investingdollarsandcents.com/1/post/2015/09/12-things-to-consider-if-you-want-to-start-investing.html

This article is technically about investing, but I really like that it gives you a good mindset about how to think about debt, and weigh the options in investing, saving, or paying off debt.

Where to Start Saving/Investing

The College Student’s Guide to Investing

There is no where safer to start than a website DEDICATED to college investing.

http://www.invest-safely.com/personal-finance-goals.html

The writer for Invest Safely is on point, every time. These 8 points are sure to get anyone started on the right track investing and saving.

How to Win the Stock Market Game [4 Rules]

If you want basics on how to invest in stocks, this is the place to start. It shows statistics and gives basic explanations for types of stocks, mutual funds, and other places to start with your money.

http://www.moneysmartguides.com/become-stock-market-millionaire

This is a very good basic guide explaining how to split your investing money, how to fund an account, and ways to keep your money safe. It talks about Bonds and Stocks, and good general rules for picking investments, and ways to diversify in multiple types of securities.

How to Fund a Brokerage Account and Start Investing Online

Lastly, this is a beautiful article that gives explicit details on HOW to open an account, and basic processes for utilizing it (as well as other useful information).


What are your resources you’ve liked in these areas? What do you use for credit cards? What are your beliefs? Share them with me in the comments, and I’ll be sure to put a few quotes on Instagram.

Jacob Johnson

The Financial Ginger