Investing 101

Wow. We’re only two months into 2021, and the financial news has already made a splash. Enough hoopla has already been made about GameStop, but I do think there is one teachable moment in all of this. And that’s the buy/hold strategy. Yes, GameStop had colossal gains in a short amount of time. But with it came colossal loss. During its trading frenzy, GameStop went from $20 per share to $483 and then back down to around $40 now. For anyone who bought the stock for more than $40 (or today’s price), you’re probably worried because you’re thinking, what if it goes down further? On the other hand, if you were already invested in GameStop stock from January 1 until now, you’d still be at a gain. By focusing on the end result rather than day-to-day performance, you won’t be bothered so much by the ups and downs that all stocks inevitably endure. 

The best thing that came out of the GameStop experience is that it generated huge interest in the stock market. With recent news putting the stock market at the center of attention, this month’s topic will be especially relevant. Let’s take a look at what you need to know about investing.

Why is investing important? 

We are typically taught that we have to work for money, so naturally the only way to make more money is to work harder, right? Wrong. There is another way. We can also make more money by investing some of the money that we have made. If you ever wanted money to work for you, investing takes your seed money and grows it over time, resulting in what’s known as compound interest. Like plants, not every investment grows. But for those who spend a little time understanding how to invest, the payoff is well worth it. 

How do I get started with investing? 

Anyone can invest their money. I repeat, anyone. Most employers offer a retirement plan where the money you contribute can be invested. Children can use a parent’s brokerage account or start one of their own with an adult as custodian. Many college savings plans, or 529 plans, offer investment choices as well. If you have none of the above, you can get setup easily with a brokerage account of your own. While Robinhood has been making the most waves, there are other established names like Fidelity or Charles Schwab or TD Ameritrade for commission-free trading. 

When should I start investing? When should I stop? 

Ideally we can all start investing from the day we are born. If, like most people, that did not happen, then the next best option would be as soon as there is money to invest and the investment has to be for a long-term goal, like retirement or a big purchase. In case the buy/hold strategy was not clear earlier, don’t worry about timing the market. By remaining invested for the long-term, the end result is what matters, not what happens between today and tomorrow or next month. As for when to stop investing, you just might continue to be invested for as long as you live. After all, the best case scenario is that your money outlives you, rather than the other way around. However, if the money is for a finite goal, like a home purchase or college, then it makes sense to shift investments into something more stable like cash some time before or when you withdraw your money. 

What are the different types of investments? Which ones are best? 

Once you enter the world of investing, there is a plethora of investments you can choose from, with the most common being stocks, bonds, mutual funds, and commodities. Refer back to the Ace Academy article on Compound Interest or just do a Google search to learn about the various choices.

The second question is commonly asked in the financial industry. The truth is, no one can tell you with 100% certainty which investment will perform better or which stock to pick. There are times when a company’s stock may be doing spectacularly well in comparison to its own financials. How is that possible? It’s all up to investor mentality. Before you invest, take some time to study past performance or ask a financial advisor.

What are some smart strategies for new investors?

As mentioned before, investing comes with risk, the risk of loss. However, we can minimize risk with some simple tactics. We already discussed buy/hold strategy. Another strategy is diversification. Instead of putting all your money into one investment, why not spread it out, so one or more investments can perform well when the others don’t? One more tip is to use dollar-cost averaging instead of timing the market.

Although investing may seem like gambling, with a bit of education, you will be better off investing than gambling. So take your money, throw in a dash of diversification, add dollar-cost averaging along the way, bake for some time, and you’ve got a recipe for wealth!

If you like this lesson and want to see more, please consider a donation on GoFundMe.

A Tale Of Two Investors

Investing at an early age was one of the best things that happened to me. It propelled my understanding of money, but it also helped me gain an interest in money. Not just any kind of interest. Compound interest. Much like a flower, money requires time in order to blossom. Of all the things money can buy, it can’t buy time. That is why investing early is so important.

To illustrate the difference between investing early and investing late, let’s read a little story about Investor A and Investor Z.

The Early Investor A

Investor A sets aside $1,200 / year (or $100 / month), beginning at age 22. Since the money is intended for retirement several decades later, Investor A takes an aggressive stance and invests in the stock market, yielding 7% interest per year. Thirty years later, at age 52, Investor A chooses to stop saving any more money, but keeps the investments for another 10 years until age 62. After 40 years (saving for 30 of those years), how much has Investor A accumulated?

Cash In: $36,000

Cash Out: Approximately $223k

The Late Investor Z

Investor Z waits until age 32, or 10 years after Investor A, to start saving. At the same investment rate of $1,200 / year with a 7% market return, Investor Z continues all the way until age 62. Thirty years later, how much has Investor Z accumulated?

Cash In: $36,000

Cash Out: Approximately $113k

Doing The Math

Based on this story, foregoing 10 years of market gains costs Investor Z about $100,000. What if instead Investor Z chooses to save more money due to a late start? To reach $223k in thirty years would require saving $2,360 / year (or $197 / month). That means more cash in: $70,800 ($2,360 x 30 years), instead of $36,000 ($1,200 x 30 years). And to think, time alone could have made that!

While this story demonstrates the value of getting an early start on investing, late bloomers should not be discouraged. If anything, this is a lesson to start investing as soon as possible. The more time goes by, the more you miss out on growing your money. Keep in mind that investments go up and down, so having more time to smooth out the dips also helps. Overall, working with a long time horizon certainly benefits you more than investing over a short time horizon. How would you like to see your money double, triple, or more without adding more money? The key is to start NOW!

Homework: Do the math. Find an online calculator or use one from your financial institution to determine how much you can accumulate if you start investing now. What would it look like if you wait 10 years to start? How much more would you need to save to get the same end result?

If you like this lesson and want to see more, please consider a donation on GoFundMe.

Compound Interest

In addition to the seven natural wonders of the world, Albert Einstein believed in an eighth wonder of the world: Compound Interest. What is compound interest? In a nutshell, it’s money making money.

How does one unlock the door to compound interest? Through investing. The easiest way to understand investing is to think of a plant. Start with a seed (investment), and the plant will eventually sprout branches. Some branches will have leaves (interest), but others will sprout new branches, which yield more leaves (more interest). Sure, there may be setbacks, but if your plant thrives, your little seed has grown into something much larger. Imagine if you could do the same with money? You can! That is the power of compound interest. Branches growing more branches.

Time plays an important factor in investing. Just like plants need time to grow, your money needs time to grow interest and then more time for that interest to compound into more interest. The earlier you invest, the more your money can grow on its own. To calculate what time can do for your money, use the Rule of 72.

Rule of 72: Divide 72 by the (%) interest rate you earn, and the answer is how many years it will take for your initial investment to double. For example, if you earn 8% interest on a $1,000 investment, 72 divided by 8 equals 9. Without adding any more money, that $1,000 investment will double to $2,000 in 9 years.

When it comes to investing, your choices vary widely, but they boil down to a few basic types.

Cash

Believe it or not, cash is a type of investment because it has the potential to earn interest. Some common cash investments are money market accounts or certificates of deposit (CD). Although cash tends to be the least likely investment to lose money, it does not typically yield a lot of interest. But for short-term needs, also known as liquidity, this is a good choice to earn a little bit along the way.

Bonds

Have you ever borrowed money and needed to pay interest when you returned the money? When you invest in a bond, you are loaning your money to others, and after some time, they pay back your initial loan with interest. There are many types of bonds you can invest in, so the interest rates and chances of getting your money back fluctuate depending on who you are loaning the money to.

Stocks

Buying stock is essentially owning a part of a company, hence you buy “shares” of that company. A stock earns money when the company is viewed favorably by investors and loses value when the company is viewed negatively. Stocks have vast potential to grow, but also come with the risk of losing money. Much like plants weather different seasons, stocks can take a bumpy ride. This is why stocks should be seen as long-term investments, so that your money is given a chance to ride out any volatility. You may have also heard of investments called mutual funds, index funds, ETFs, options. These are simply variations of investing in stocks and sometimes bonds.

Real Estate

Ever wonder why most people say buying a home is better than renting? It’s because buying a home gives you the opportunity to earn money when you sell the home, assuming the home grows in value. To invest in real estate, do you have to buy a house? No. You can actually invest in real estate companies through real estate investment trusts (REIT) or even buy shares of publicly traded real estate companies on the stock market.

Tying It All Together

When thinking about what to do with your savings, you will most likely take more than one approach to investing. You may even have investments not listed above. The key is to plant those seeds, and then witness the wonder of compound interest!

Tune in next week as we explore credit cards. Good thing or bad thing? Subscribe below to automatically receive weekly lessons in your inbox!

Homework: Do your research! Choose 5 of your favorite companies or brands that are publicly traded on the stock market, and follow their stocks for the next month (or longer). If you initially invested $10,000, how much did you earn?

! LinkedIn Readers: If you would like to continue these weekly lessons, please bookmark Ace-Academy.org or subscribe below! The next post will be the last one available on LinkedIn.

If you like this lesson and want to see more, please consider a donation on GoFundMe.