So you have a few extra dollars between your grocery store runs, weekend get-togethers, new clothes, insurance, other insurance, that third insurance you know you’ll never need and your ever-growing library of subscriptions – Disney+, Netflix, Hulu, HBO, Amazon Prime, FabFitFun, and Xbox Live. Now you put those dollars in your wallet and swear you’ll never spend them...DoorDash sends a friendly notification reminding you that your local macaroon shop needs your support. Zing! Purchase Complete. Back to square one. Why did you do that?! You just swore you wouldn’t. It doesn’t really matter though…“it’s just a few bucks.”
You’ve heard it all before. Mom swears she told you to buy Tesla ten years ago, but she also can’t recall the name of the last movie you watched together. Grandpa gave you his best elevator pitch on buying silver coins because, “It’s the safest thing money can buy,” and his friend Leonard from the retirement home was able to cash in for a hot, new set of hearing aids. Yes, it’s investing. No, you don’t need to be Warren Buffet or a crusty coin collector, and you don't need a suitcase full of cash to make a difference in your budget. Wall Street tries to spin the tale that investing is a complex labyrinth of fees and terminology, but it all boils down to a few core concepts that we want to break down for the Adulting community and those first time investors. This article will touch on: risk tolerance and the most common types of investments - stocks, bonds, and investment funds.
"If I told your brother I'm sure he woulda bought Tesla in 10'," - Your Investment Advisor Mom
Risk Tolerance and the Art of Gambling
Not everyone likes gambling. The flashing lights and huge upside advertised at most casinos are enough to entice and spit out the average person, and if you don’t know how to play the game, your odds are even worse. I was once in a Vegas taxi with a man from Texas who refused to get out because he had bet his entire life savings on a game of blackjack. He did not want to go home to his wife and kids and let them know what he had lost – over $175,000 in a single night. He is someone we would describe as having a high-risk tolerance, and given his cohesive story-telling ability against the amount of empty glasses on the floor, a high-alcohol tolerance as well. That same night, I saw a twenty-some woman go from down $200 to up $16,000. I asked the woman how she won so much and she told me, “To start, I only bet what I’m willing to lose, and after that I only bet what I’ve profited,”. We would describe her as having a low risk tolerance.
In other words, risk tolerance is how much you are willing to gamble and the degree of variability (or risk) on that investment. This same concept applies to investing. If you determine that you want to risk it all and put 100% of your spare change into Dunder Mifflin Paper Company, you better be darn sure that Staples only sells staples. This is an important underlying aspect of investing as it determines how much you will invest and in what investment products aka 'securities'. If you were to let your money sit in your checking account as most people do, you would earn 0% on that money. But, if you expand your risk tolerance you have the opportunity to earn 5%, 10%, or more on average for the money you invest.
Investment Types - How Your Waiter Can Help You Invest
As an introduction to investing, we are only going to dive into the basics here – stocks, bonds, and investment funds (mutual funds and ETFs). We’ll save that pesky 401k for another time. Isn’t this exciting? Don’t these terms inspire you to be your best self?! No, they don’t. In fact they are probably so boring you’ve forgotten why you’re here. You’re here because you have some money, but you want more money. Money can be used to trade for the items, trips, Krabbypatties, or subscriptions that you want. You like money, don’t you, Squidward? Okay, stocks, bonds, and investment funds. Let’s continue.
A stock is a piece of ownership in a company, also known as a 'share'. These pieces of ownership are bought and sold between individuals or groups at a public marketplace such as the NASDAQ (an all online marketplace) or more famously the New York Stock Exchange (both a physical and online marketplace) on Wall Street in New York City. Now, if you buy that Tesla stock your mother was nagging you about don't change your LinkedIn profile and Instagram Professional page to say 'CEO'. For context, there are over 185 million shares just like yours, making you a .0000005% owner in Tesla. This may seem insignificant, but that small percentage of ownership in a large and growing company can go a long way. At the time of writing this article, Tesla (TSLA) is worth $1,600 per share. If you had purchased Tesla back in 2010 when it was $20 you would have earned 8000% on your original investment. On the other hand, if you would have purchased General Electric (GE) five years ago at $30 you would have lost almost 80% of your investment because the stock now trades at only $7. This goes to show how volatile this investment can be given that the price can change drastically at any moment. For simplicity sake, a stock price rises or falls based on what people will pay for it, but trying to predict what people will pay for something is difficult. I can’t even guess what I will order at a restaurant when the waiter comes to the table too early, so how am I supposed to know where someone else wants to sit their money?
The answer is a) information b) going with what I typically order c) asking the waiter what other people get. If I had read the menu thoroughly before starting on some tangent about the coolest Teletubby (obviously Po), then I would have known what I wanted to order. If I am rushed, I know I will typically go to 1 of 2 items – pasta or grilled chicken and broccoli. If I ask the waiter, it is common that he will know to suggest something the last table ordered, but most likely the highest priced dish. In stock investing, I typically make investment decisions based on companies I have read about and see promising long or short term growth (depending on my risk tolerance), those that are staples of the investing community and have consistently climbed such as F.A.A.N.G. stocks (Facebook, Apple, Amazon, Netflix, or Google) or services/products I personally use, or those that are considered 'active' or have higher trading volumes and therefore it is easier to quickly get my money in or out. Overall, the objective is to buy stocks at a low price and sell at a high price. Along the way, you hold your money in one or multiple of these stocks until it reaches a peak in price and you are ready to use it - the typical annual return being about 10%. Unless you are looking to make a career out of day trading, I typically stick to these investment strategies for the money I’m willing to lose.
Investment Types - Why Bonds Aren’t Just for Old People
A bond is a loan to a company, institution, or government. For providing this small loan, the group pays the holder fixed interest payments. These are typically dependable investments backed by the fact that it is unlikely that the government or large company will fail to have the funds to pay you. Being a stable investment, bonds typically have lower returns at around 5% and are therefore better as long-term investments. The ratio of 'dependable' bonds to the more volatile stocks you should invest in depends on how long you’re investing your money, what you’re investing for (house, car, retirement, etc.) and your risk tolerance. If you’re like most of our Adulting community a good rule of thumb to start would be 80% stocks and 20% bonds in your investment portfolio. This allows for significant upside potential to grow your wealth, but also a solid base to park your money for the long term. As you come closer to retirement, people often shift to a higher percentage of bonds because they are a safer investment and investing at that stage in life is more about wealth retention. Just think if Leonard from the retirement home lost all of his money now, what would he do? Start a podcast and do Tik-Tok dances? Actually...not that bad of an idea. I'm going to jot that down. BRB.
Investment Types - ABC's of ETFs
Lastly we have investment funds – mutual funds and ETFs or exchange-traded funds. Both terms are professionally managed, diversified groups of stocks, bonds, currencies, or commodities like corn and oil. Think of an ETF or mutual fund as a Netflix account. You pay a single price for the subscription, but it contains thousands of possible TV shows, movies, and documentaries - some of which are new releases and others are those tried-and-true classics. The way to differentiate between these two securities is that the mutual fund acts like a stock, while an ETF is bought and sold like a stock. A mutual fund is actually a company that has professionals who invest in a defined set of stocks, bonds, etc. By buying shares in this company, like you would when buying a stock, they allocate a specific percentage of their returns. An ETF can be bought on a typical stock exchange at fluctuating prices – for example the SPY, QQQ, or VFINX. These investment types are low risk and usually provide optimal returns through a diversified grouping of investments managed by professionals who live by the mantra, “don’t put all your eggs in one basket,”. For example, the previously mentioned “VFINX” contains stocks from the top 500 companies in the US; all in one package. If one stock does not do well that day, no problem, because there are 499 other companies within the single fund that had the chance to perform better. ETFs and mutual funds can be fairly diverse and can include hundreds of bonds, real estate securities, currencies, or other financial instruments.
This has been quite a dump of information, so here is a quick summary to close this out:
Risk Tolerance - Your willingness to accept losses or gains based on your investment objectives and budget. Only invest money you are willing to lose.
Stocks - Piece of ownership in a company. Volatile. Better for people looking for more risk and possibility of a higher return.
Bonds - Loans to large companies or institutions. Stable because they are backed by the same large groups. Earns more than letting money sit in your checking account.
Investment Funds - Strategically structured groups of stocks, bonds, and other types of investments designed by be the best of both worlds - safe and profitable.
Investment Legal Disclaimer and Why I Don’t Want to Be in the Clink
All of this information is publicly available through the Financial Industry Regulatory Authority aka FINRA, or based on personal experience. None of the information on this website should be viewed as financial advice or recommendations. If you are lacking confidence in your ability to start investing, I suggest you speak with a state Registered Investment Advisor (RIA) to help you determine what your investment goals may be and how to reach them.
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