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How to Plan Your Financial Future

Lesson 14 of 18

Basic Investing Concepts

Erin Lowry/Broke Millennial

How to Plan Your Financial Future

Erin Lowry/Broke Millennial

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Lesson Info

14. Basic Investing Concepts

Lesson Info

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? Any time 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 terms you're gonna hear is aggressive, moderate and conservative. Aggressive typically means you're investing in stocks or equ...

ities, really being an interchangeable term. So if you're investing in stocks in the stock market you tend to be more aggressive. It meaas 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 wanna put into something a little bit more conservative. So this idea of time horizon also can help, hopefully, you potentially calm your nerves as you weather the ups and downs of the market. Investing is important but know the stock market does go up and down. It's a cyclical beast, it is going to go up and down throughout your life as an investor. So hopefully this idea of time horizon help you kinda keep a gut check on those days that you might check your investments and it all looks like angry, red, downward arrow numbers because you've lost a little bit of value as the market's gone down. But just know hey I don't need this money for another 20 years. It's all gonna come back around, we're okay, it's gonna keep compounding and growing. 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 yay 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 kinda 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 alright. Other people it doesn't matter how well they try to rationalize, it's gonna 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 64 and the stock market, we go through another recession, everything 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. That means you're gonna have to take money out of your investment portfolio when there's not as much value, not as high of a return. So that's one thing that we need to think through when we think about risk tolerance. So like I said, having a high tolerance 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 you're making 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, really easy way to understand this. Now, I am going to use actual real life companies to explain this concept. This is in no way me endorsing you go out and invest in these companies. I always have to put a disclaimer out there any time I use it, but I think it's just easier to understand when I use companies that are accessible to us especially when I talk about the idea of sectors. There are different sectors of the stock market, things that you can think about like tech, utility, transportation, healthcare. Different things that companies are doing really account to these different sectors. So when we talk about diversification the idea is not just oh, don't put all your money in one company. It's also don't put all your money in one single sector. So for a real life example let's say that you went out today and you bought one share of Amazon. So you own one company in one sector, the tech sector. Well tomorrow you decided to diversify so you went out and bought one share of Apple. Well now you own two companies so you're a little bit diversified but they're still both in the tech sector. So you're not diversified in that way. So on day three you go out and buy a share in BMW. So now you've got three different companies a bit more diversified and we're on two different sectors, we're in transportation and we're in tech. So that is really what we're talking about when we mean diversification. I also don't want you to think about individual stock picking, I'm just using that example for simplicity. One of the really easy ways to diversify is to look at things like index funds, mutual funds, and exchange traded funds because those are bundles of companies sometimes across different sectors, sometimes all in the same. But it's a bunch of companies all together that, this is a very strange concept, you are essentially pooling your money with strangers in order to get access to these. But you're owning a small percentage of a company across a bunch of different sectors and/or a bunch of different companies in one sector. So think about it as buying a big bundle of investments all together, which automatically diversifies you. It makes it a little bit easier for you. 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 wanna 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, aka stocks, fixed-income, for example bonds. You might have heard of these, you might have also received one from grandma at like graduation or your birth. And then it matured 20 years later and you got like 40 bucks 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 crypto-currency as a different kind of asset class but these are the three main ones we wanna 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 50/50 stock and bonds 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, why 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 they are also things you're gonna begin to hear when you start to build your own retirement portfolio and you do start investing. So before we move on I'm gonna take a brief pause if there are any questions related to investing terms. So I have about four 401K's from various jobs ranging in like 1,000 dollars here to, you know, other larger ones from longer employment. And I keep telling myself I should roll these all over and then I've even requested the paperwork and then just let it slide. So, can you tell me why (laughs) and like light a fire under my butt. Like why should you, or even should you I assume you should, roll all those over and consolidate maybe into one fund? Well you're jumping the gun because we are gonna talk about that in a little bit. But the super simple answer is it makes your life easier. And also, will you remember where they all are in 20 years? Maybe not, so why not simplify your financial life and just house everything together. That's the really simple answer. I'll dig into it just a tad more in a couple minutes but I would definitely encourage just keeping everything together for the sake of your sanity. Anything from the chat room, any other questions? Yes. This is more a specific question about IRA's specifically. So if we're gonna go into more product offerings I'm happy to hold it, but I was wondering if you could share or if in your experience you've learned what a common fee structure would be for a portfolio management for an IRA? Personally, I use like a third party person to help me out and I'm curious if their fee is about industry standard or not. So I was wondering what that would be, if there is one for instance? It depends, a person's always gonna be more expensive than a robo advisor which is going to be more expensive than you doing it personally. In terms of a percentage, if you're paying north of 3% I would definitely be evaluating the value of that, but that's just my gut reaction in talking to some folks. So, it's also about running the math. Maybe that person is truly bringing the level of value you're paying for. And any time you're paying a fee that's what you need to think about. When it comes to investments I'm not as aggressive about the fees as when I'm talking about banking products mostly because there probably is value in some of them. It's just doing the math to see if you're getting that value as well. Question from Kat, what is an example of a cash equivalent? And that was in the slide that was about cash and asset allocation. Great question, I should of mentioned that. A certificate of deposit would be an example of a cash equivalent because you're not actually investing you're just locking money up for a period of time to get a higher interest rate. It's kind of a forced savings account that you're not allowed to access your money for maybe a year or maybe five years but you get a higher interest rate than the savings industry standard most of the time not even all the time anymore as the savings market heats up a little bit here. And then, one more from Mackenzie who says, "I will soon have to decide between two options provided by my employer; a pension plan or a stand alone 401K plan." And she's a 20-something, no idea about retirement options. Although, that's why you're here. And so, how would you assess what would be the better option? First, go to HR or payroll, whoever you can get access to to talk through the different options. Pensions can be great, but it depends. When do they vest, when do you get access? If you left your company early what happens to that pension? With a 401K it might be a little bit more in your control. And also, what are the different employer matches? If you do go into the pension, how much are you getting compared to if you are investing in the 401K? Is your employer matching, how much money do you get? We're gonna also get into the idea of vesting, when you can walk away with your employer contributions. That's coming up shortly. So there's not one cut and clear answer. I know a lot of times people are like, oh pensions are great. And I think it's also because we don't really have access to them anymore. If you don't think you're gonna stay at that company forever a pension might not be the best fit for you. But I bet there is somebody at your company that you can go speak with and get more clarification on these options.

Class Description

Short on time? This class is available HERE as a Fast Class, exclusively for Creator Pass subscribers. 

According to the experts, millennials won’t be able to retire until they’re about 75 years old, and that’s if they’re lucky! And some data shows that three-quarters of Americans are not ready for retirement at all. No question about it, people of all ages and backgrounds are woefully unprepared for their golden years.

Most of us are too busy worrying about our current debts and daily costs of living to even think about retirement. But Erin Lowry shows you that putting just a small amount aside each month as early as possible will yield great results. She’ll give you solid advice about how to avoid excessive fees, costly financial instruments, and shady financial advisors.

Erin will also address how to talk about money with the important people in your life, especially those with whom you’ll be sharing your finances. It’s the best way to determine your financial compatibility and help you achieve your financial dreams.

In this class, you’ll learn how to:

  • Make compound interest work for you so you can retire at a reasonable age.
  • Find the right retirement account for your specific needs.
  • Figure out your level of risk tolerance and time horizon.
  • Choose an honest, helpful financial planner or advisor to help you reach your goals.
  • Navigate awkward conversations about money and feel less vulnerable.
  • Decide if you want to work as a team to achieve your financial goals.
  • Identify red flags about people’s financial habits and lives.

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Chris Sundell

Amazing course!! Great instructor! Everything that's essential is covered. This has been the kick starter to my new year. Thank you!