Basic Investing Concepts
now we do have to get into some basic investing concepts. I am not going too far down the investing rabbit hole here with you today, but I want you to understand these terms because they play a key factor into how exactly you are picking your investments and you are planning for your retirement now. The first one is this idea of time horizon, which simply put is when do I need access to this money anytime you invest? That should be one of your first thoughts. And the reason it should be one of your first thoughts is because that helps you determine how much risk to actually put on your money. Because if you have a really long time horizon retirement being a great example, if you're young, if you're decades away from needing access to that money, well, you can take a little bit more risk here right now. You can be a little bit more aggressive. That's typically the term you're going to hear is aggressive, moderate and conservative aggressive typically means you're investing in stocks or ...
equities really being an interchangeable term. So if you're investing in stocks in the stock market, you tend to be more aggressive. It means you have a little bit more time before you need access to that money. But as you get closer to the time that you need to take the money out and use it for day to day life, then you probably don't want it invested in something too risky. You want to put into something a little bit more conservative. Next is risk tolerance really, that gut reaction that you have to the idea of losing money now, I don't think any of us feel like we're losing money. That's not what I'm saying. Of course. But what I am saying is that sometimes you have a little bit of a more high tolerance for taking risk. So it could be just generally how you feel. It could be that you are able to kind of mentally move beyond this idea of Right now today, if the market has gone down, it's okay. I don't need this money for 30 years. It's not gonna phase me, I'm all right. Other people, it doesn't matter how well they try to rationalize, it's going to make them feel very uncomfortable. So you do need to have an understanding of your own risk tolerance for a variety of reasons, But one you also need to know how much risk you should be taking, not just how much you can stomach because maybe you're 65 and you need that money in five years and you have a super high risk tolerance and you're still all invested in stocks. Well if you get to and the stock market, we go through another recession and everything gone has gone down. You've lost a lot of money and you don't have the time to allow it to recoup and come back up because you're gonna need access to it at a time when it's down. So like I said, having a high tolerance it might mean that you take too much risk and you don't moderate it over to being a little bit more conservative when you need access. It will also say risk tolerance is another good reason to hire a professional at certain points of your financial life because they can help balance you out and make sure that you're making the right money moves. They can help talk you down if you're feeling a little stressed and uncomfortable about what the markets are doing and they can just keep you on track with your goals, diversification is the old cliche. Do not put all your eggs in one basket. Another final thing to think about in diversification is getting out of just one market if you have four different index funds but they're all in the U. S. Market. Well you're diversified across our market but you might also want to go invest in asian markets, european markets and go international as well with a percentage of your portfolio in order to add another layer of diversification. So again it's about spreading around risk asset allocation is this idea of putting money into different sectors of investments. There are three main asset classes. Equities ak stocks, fixed income for example bonds. You might have heard of these, you might have also received one from grandma like graduation or your birth And then it matured 20 years later and you got like $40 depending on the type of bond it was. And then cash and cash equivalents, there are of course different asset classes. Think things like real estate people even might include Cryptocurrency as a different kind of asset class, but these are the three main ones we want to be talking about, especially when we think saving for retirement. And the idea of asset allocation is the percentage of your investment portfolio that you are putting into these different asset classes. So in real terms say you're 30 years away from being able to retire and you've got a relatively high risk tolerance, so you're putting 80% of your investments into equities into that particular asset class, 20% is going into bonds and 0% is in cash, so that's how asset allocation works. And then again as you age closer to needing access to that money and taking it out, You're gonna go to a little bit more moderate, which might be a 5050 stock and bond split and then a little more conservative going more towards cash and bonds towards the end if you're going conservative now, why this matters what I'm talking about all of these is because again it's investing for retirement, it's not just saving for retirement. So we need to have some common language and a basic understanding of how investing works and how the stock market works. Again, I know this is a very, very brief example, there's so much more to learn, but I just want you to start to understand these terms because there are also things are going to begin to hear when you start to build your own retirement portfolio and you do start investing.