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Investing for Beginners: Steps to financial freedom

Investing for Beginners

Steps to financial freedom

By: Giovanni Rigters

Copyright © 2016 by Giovanni Rigters

All rights reserved.

No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems, without permission in writing from the author. The only exception is by a reviewer, who may quote short excerpts in a review.

Table of Contents

Important Disclaimer

Introduction

Chapter One: Securing your future

Chapter Two: Your investment options

Chapter Three: Retirement account heaven

Chapter Four: Let’s analyze investments

Chapter Five: Investing for the long run

Chapter Six: Beware! Things not to do

Chapter Seven: Conclusion

Important Disclaimer

This book is presented solely for educational and entertainment purposes. The author is not offering it as legal, accounting, financial, investment, or other professional services advice. The content of this book is the sole expression and opinion of its author. It is not a recommendation to purchase or sell equity, stocks, or securities of any of the companies or investments herein discussed. The author cannot guarantee the accuracy of the information contained herein. The author shall not be held liable for any physical, psychological, emotional, financial, or commercial damages, including, but not limited to, special, incidental, consequential or other damages. You are responsible for your own choices, actions, and results. Please consult with a competent tax and/or investment professional for investment and tax advice.

Introduction

You’ve been given two options, you can either work as a door greeter at your local grocery store in your fifties, sixties and even seventies or ….you can sip on some piña colada while relaxing on the beach with your significant other, enjoying the breeze and calming sounds of the ocean.

This is an easy choice to make, of course most people would choose the second option, but many people nowadays don’t have that option. They are stuck working in their golden years paying off debt, medical bills and still helping their children or grandchildren financially.

Don’t let this be you, you still have a choice.

Of course, life is not this black and white, but more people then you think will have to face this reality. Life is becoming increasingly difficult pretty fast and no positive change in the right direction is to be seen on the horizon.

Student loans are setting us back, rent is increasing (sometimes faster than inflation), houses are getting more expensive and medical costs keep going up.

On a day to day basis we have enough to worry about; additionally, we also have to plan for our retirement, because nobody else will. It’s not like the good old days where you worked 30+ years for one company and end up retiring with a fat pension, that will help you cruise through your senior years.

Nowadays, pensions are getting cut or even eliminated and retirement planning is being pushed on the individual. It’s also highly likely that you’ll be working for several companies throughout your working career.

The fact that you’re reading this book is a testament to your self-discipline in taking your financial future in your own hands, so you can achieve retirement bliss by learning the basics of investing. Give yourself a pat on the back and let’s get started.

Chapter One: Securing your future

The concept of investing is simple. You’re putting money away in order to receive a profit on it. Your money has the potential to be worth more in the future. You’re basically delaying immediate gratification (money you would spend today) in order to enjoy your future potential profits.

Now, I said potentially because there is always the risk that you can lose all or a big chunk of your money. Take a look at the graph below:

Figure *1*.1 S&P 500 Performance – Source Finviz.com

You might have heard about the S&P 500 in the news, online, or from friends and family members. The S&P 500 represents the 500 largest companies in the US. This is used as an indicator for how the US stock market is performing. What you’re looking at in the image, is the summed up performance for all the 500 companies by month for over a decade.

Now, some peculiar things have happened in that timespan. Back in 2000 we had the dotcom bubble, which saw the market crashing from 2000 (at its height) to around the beginning of 2003.

Investors like to see their money growing, so any downward trend, like we saw starting in 2000, will have people panicking and selling their investments at a loss.

Next up was the Great Recession of 2008-2009, the market crashed again and many investors lost a lot of money in their investments.

Now look at number three on the chart, this is where we are now, the market has not gone up or down, but sideways for a considerable amount of time. If you look at 2015 you can see that the market was basically flat the whole year. This is also not an ideal situation, because a flat market can signify minimal gains and even some losses.

If you look at stock market performance alone, at its height of 2000 it took the market until 2013 to get back to where it was and continue to grow past that point. This is a time span of 13 years.

When you have your money (capital) invested in the stock market, it has the potential to gain in value, which is called an unrealized capital gain, but it can also lose value, also called an unrealized capital loss. As long as your money is in the market it can either stay flat, gain or lose value.

Unrealized just means it’s not tangible yet, this unrealized capital of yours that’s invested in the market becomes realized or tangible when your investments are sold.

Figure 1.2 VFINX performance – Source Finance.yahoo.com

Let’s look at this from a different angle. I took a popular fund that tracks the S&P 500 and you can see the performance year over year. With the dotcom bubble that burst in 2000, the market lost 43.23% (from 2000-2003) of its value.

The crash of the Great Recession saw the market decline 37.02%.

Now, I’m not showing you this to dissuade you from investing in the stock market, but I want you to be aware of what can happen with your nest egg when your money is in the market. Never assume that the market can only go up.

Returns of 8, 10 or even 12%

This brings us to the next topic of investment returns that you will hear about. If you go to the bank, investment firms, or talk to a financial advisor, you’ll often hear talks about investments with an 8-12% annual return.

The notion is that if you invested let’s say $1000 in year one and if you had a 10% return on investment, you would end year 1 with $1100 (10% of $1000). In year 2 your investment actually grows to $1210 instead of $1200, because the 10% interest applies to your new balance of $1100 (not $1000). This is also called compound interest, because you'll start making money on your interest.

Just look at the table and graph below:

Table Error! No text of specified style in document..1.1 Growth of $1,000

Figure 1.3 Graph growth of $1,000

The graph shows you a nice representation of how your money is growing. A starting investment of just only $1000 is nothing to brag about and will not be able to sustain you in your retirement, so you have to invest more money on a frequent basis and for a longer timeframe.

[* The illusion of the 8, 10 and even 12% interest rate *]

Compound interest that allows your money to grow fast is great. My problem is with the average interest rates that you will hear about. Always remember that the interest rate that you hear about is based on the performance of the underlying companies which are invested in. Past performance is not a surefire indicator of future performance.

You will hear or read about how the market has performed historically . You’ll even hear this from so called financial gurus, “the market has grown an average of 10% since inception.” What they don’t show you are the periods where the stock market was performing horribly and many people lost their shirt with their investments.

You can also manipulate the interest rate by choosing time periods where the market was performing great. For example, since 2009 and up to the beginning of 2015 the market not only rebounded but has performed great (just look at the first image).

So, many fund managers will use such an example as to why you should invest in the market; what they are knowingly ignoring to tell you is when the market was performing horribly, they like to focus on the good and not the bad.

Remember, that 8-12% average interest on your investment means nothing when you are about to retire and the portion of your investments that is in stocks, loses value of more than 30%.

For example, you worked all your life diligently investing your money and have amassed an investment portfolio of $1 million. You still have around 30% in stocks ($300,000). The great recession of 2009 hits and your assets in equity (your investment portion in stock) lost around 37% in value.

That’s $111,000 that you just lost (37% of $300,000) and now your $1 million portfolio is only worth $889,000 (not even accounting for other investments, like bonds, that could’ve lost you money).

Now this example does not apply to everyone investing in the stock market, because it depends on which asset class (which we will discuss) you had your money invested in and what your allocation was. But it shows you how quickly things can turn sour.

People expecting their investments (nest egg) to grow indefinitely all of a sudden will be blindsided when a market crash or correction occurs.

Interest explained

One last thing, where does this interest that you make on your investment come from? It comes from capital gains, dividends, and unrealized capital gains.

If the economy is doing well, people are optimistic about the future, making money and spending lavishly. The money they have to spend will also reflect in the stock market, because people will have more money to set aside for their retirement accounts.

Capital gains

Whenever you sell your investment for a profit it is called a capital gain. If you invested $100,000 and sold your investment for $120,000 one year later, your capital gain (profit) was $20,000 ($120,000-$100,000).

The opposite is called a capital loss. If you invested that $100,000, but sold a year later for $75,000 you are down $25,000. Which is also called your capital loss.

Unrealized capital gains

With an unrealized capital gain, the gains you’ve made on your investments are still invested in the market, so they have the probability to go up or down in value.

For example, if you have $10,000 invested in the market, the next day it could go up to $10,050 or it could go down to $9,800. As long as your money is still tied up in the stock market it has the potential to go up, down, or stay flat.

Dividends

There are numerous companies that pay dividends; this is a portion of the companies’ profit paid out to shareholders. Usually, big stable companies pay out dividends, also called blue chip companies.

Companies experiencing fast growth, like start-up tech companies, often times do not pay dividends, because that’s money that’s put back in the company which is used for growing the company.

If you ever get a statement from your investment firm about how your investments are performing, you will most likely see your beginning balance, ending balance and your interest rate. Now, you have a better idea where that interest comes from.

Let’s look at an example. The Apple company (AAPL) sells products that consumers love and use every day. If people value Apple products highly and the company keeps increasing their quarterly profits, it should reflect positively in the Apple stock. The value of the company will increase on the stock market and people are willing to pay a higher price for the stock.

You decide to buy 10 shares of Apple at $100 each, so your investment in Apple is worth $1000. Over the course of a year the stock gained 8% in value, so now the price of the stock is $108. Since you have 10 shares, your investment is worth $1,080. So your unrealized capital gain is 8% or $80.

As long as you are in the market your investment could potentially gain or lose value. The next couple of days your investment in Apple increases to $1,100 and you decide to sell. Now your realized capital gain (profit) is 10% or $100.

Apple decided to pay a quarterly dividend of 50 cents per share, which is $2 total for the year and since you have 10, you received $20 worth of dividend income. This $20 plus your capital gain of $100 is your actual interest . So your total interest is 12% instead of just 10% ($120/$10,000).

So to keep it short and simple, just remember, compound interest consists of unrealized capital gains, realized capital gains and dividends.

Chapter Two: Your investment options

You have the choice of investing your money in different asset classes. The main ones are listed below:

Figure 2.1 Asset class pie

Equities: this consist of stocks, which is nothing more than a piece of a company that you can own. Many big well-known companies have stocks/shares outstanding in the billions, which means that billions of shares are owned by investors on the market that can be traded.

You can look at a company like a big pie. Slice it up in ten pieces, take one piece and you’re in possession of 1/10th of the pie (company). Most companies their pie are sliced into billion pieces.

Companies can be categorized by industry but also by their size. The ten industry categories a company can belong to are:

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p<>{color:#000;}. Consumer staples

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p<>{color:#000;}. Consumer discretionary

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p<>{color:#000;}. Energy

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p<>{color:#000;}. Healthcare

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p<>{color:#000;}. Financials

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p<>{color:#000;}. Utilities

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p<>{color:#000;}. Telecommunication services

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p<>{color:#000;}. Materials

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p<>{color:#000;}. Industrial Goods

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p<>{color:#000;}. Information Technology

A company’s size is measured by its market capitalization, also known as market cap, which is the total value of the company on the stock market. You can calculate the market cap of a company by taking the amount of shares outstanding x the price of one share. Microsoft (MSFT) has 7.91 billion shares outstanding and the price of one share is at $54.65 at the moment. This puts MSFT market cap at $432.28 billion.

The three most used categories for size are: small, mid, and large cap, but you also have micro, nano, and macro cap companies.

A small cap company is one that is worth less than $2 billion and a large cap stock is worth more than $10 billion. Anything in between those two is considered a mid-cap company. So a company like Twitter (TWTR), which has a market cap of $12.72 billion, falls under the large cap category.

Fixed Income: this consists of bonds and annuities. A company or government that’s in need for money can issue a bond, which is like an I.O.U.

For example, the government might be in need of some money for public services, to restore roads, upkeep of government buildings, etc. The government decides it needs to borrow $1 million. It borrows this from investors with a promise of paying them back their principle (initial investment) after a certain amount of years. Now in order to use investors’ money, they decide to pay 6% interest and on year 5 give the investor his or her original principle back.

You decide to buy a couple of these bonds for $2000. Other investors also buy this bond and together your money is pooled so the government got the $1 million it needed to borrow. Because bonds pay a dependable interest and the government almost never defaults (fails) on their agreement, bonds are seen as more dependable and stable investments.

Cash: cash assets are Certificate of deposit (CDs), money market accounts, savings accounts and checking accounts. Anything that is liquid, meaning you can get access to it fairly fast. The downside of cash as an asset is that it has the potential to lose value, because of inflation.

Other: Other assets that you can own are commodities, real estate, Forex, paintings, hedge funds and royalties to name a few.

Whenever there is talk about an economic collapse or decline, people get nervous and start talking about buying gold, because the dollar will lose its value. Gold and silver are known as commodities.

Other commodities you could come in contact with on the market are grains, energy, softs, meat and wheat. You get access to commodities on the commodity exchange.

The FOREX (foreign exchange) market does not get as much attention as the other markets, but is still highly important. This is the art of buying and selling currencies for a profit. Unlike the stock market, the forex market is open 24/7 allowing you to buy and sell until you’re blue in the face.

Mutual funds: a mutual fund is like a diverse group of equities and/or fixed income, cash and other assets that are managed under the same umbrella by fund managers. For example, you might have a mutual fund that only contains high growth stocks, like technology stocks mixed with small cap companies and fixed income assets, one that is more balanced with both domestic stocks and foreign stocks, or one that only focuses on commodities, and the list goes on. A mutual fund can consist of all the asset classes.

The choices available to investors in choosing mutual funds are endless. The fund manager, who manages the fund, tries to grow the mutual fund by buying and selling the right equities to the benefit of the investors that has invested in this mutual fund.

One benefit of buying a mutual fund is that you have immediate exposure to a variety of stocks, bonds, and more which gives you immediate diversification.

With a mutual fund your money, as well as other investors’, is being pooled and then invested. So you don’t have to do the leg work of analyzing and buying the equities. The fund manager is the one that does all the work. The flip side however is that you will pay higher fees to invest in a mutual fund.

Not only are you paying management fees, you also pay expenses, with some being hidden. If the manager buys and sells equities in the fund you own, guess who pays all the costs associated with buying and selling. You do!!

It’s also widely talked about that most mutual funds don’t beat the market on a consistent basis.

Index/ETF funds: The difference between mutual funds and index funds is that index funds mirror the performance of the index it is following; you also pay less in fees. Most popular ones are S&P 500 index, but you have indexes and ETF funds for all kinds of markets, like foreign markets, small cap, mid cap, bonds, etc.

One of the biggest benefit people see in investing in indexes over mutual funds, is that the fees are extremely low (about 0.16% or less) compared to mutual funds, which can easily be 1% or higher. They are low, because the fund does not have to be actively managed by a fund manager and since it mirrors an index, computer servers are used to track and make automated changes.

An index fund is also a passive way of investing. The investor does not need to know everything about the market and how individual companies are performing.

Benchmarks are always used to see how the market is performing. Investment bankers and fund managers use these benchmarks to measure their own performance. Their job is to beat the benchmark. Some of the most common indexes which are used as benchmarks are the S&P 500 index, the Dow Jones Index, and the Russell 2000.

The S&P 500 tracks performance of the 500 largest companies, based on market cap, in the US. This index gives us a quick glance at how the US stock market is performing. Some well-known companies the S&P 500 follows: McDonalds, Apple, Estee Lauder, American Express and Cisco.

The Dow Jones index, or the DOW, consists of a focused index of 30 large cap US companies. All of these companies also pay out dividends. Nike, Wal-Mart, IBM and the Home Depot are some companies on the DOW.

The Russell 2000 tracks the performance of small cap stocks, 2000 to be exact. Many investors consider small cap stocks to be highly risky, but also highly rewarding.

A fund manager would take a specific benchmark, always comparing apples to apples, and try to beat it by investing in equities/fixed income and other assets he or she believes will perform better than the market.

Figure 2.2 S&P 500 Benchmark (^GSPC). Source Google Finance

Chapter Three: Retirement account heaven

You will need to have an investment account in order to gain access to specific asset classes. The most popular and well-known investment accounts are: 401k, IRA, Roth IRA, Keogh, traditional brokerage account.

The 401k is the investment/retirement account you can enroll in at your job (if your job offers one). If you work full-time or even part-time you should have heard about the 401k. This account comes with a couple of benefits. Your employer usually matches up to a certain percentage you put in.

For example, if you have a dollar for dollar up to 6% match. This means that your employer will match every dollar you put into your 401k up to 6% of your income. If you make $50,000 and decide to put 10 percent of your income in your 401k, you’re investing $5,000 (10% of $50k). But since your employer matched you up to 6%, you get an additional $3,000 from your employer (6% of $50k).

A second benefit of the 401k is that you can ask your HR personnel questions you might have about your 401k, so you’re not doing this all by yourself.

The investment choices you have available in your 401k might be limited. Usually, there are a couple of mutual funds, target date funds and I’ve also seen some index funds. Some companies also allow their employees to buy the company’s stock.

If your job doesn’t offer a 401k, you can open a traditional IRA (individual retirement account) or a Roth IRA. There’s a limit to how much you can deposit yearly in such an account and this limit is considerably lower than a 401k, but you will have access to more equities and fixed income assets compared to a 401k. You’ll also be able to purchase shares in individual companies.

The biggest difference between a traditional IRA and a Roth IRA is that with the IRA any contribution you make is tax deductible, but you will pay taxes on your withdrawals in retirement (taxed at an ordinary income tax rate). The Roth IRA on the other hand is funded with post tax dollars, but the great thing here is that your money grows tax free and withdrawals at retirement are also tax free (unless the government ever decides to change their mind).

There are penalties associated with each retirement account. You will get hit with fees if you withdraw money out of your account before your retirement age, which at the moment is set at 59.5 years. There are exceptions however, like buying your first home, paying for medical expenses and with the Roth IRA you are allowed to withdraw your money you put in at any time if the account has existed for at least 5 years.

Some people don’t want to wait till retirement to have access to their money. They opt for a traditional brokerage account, instead. With this account you can buy and sell investments any time without having to worry about penalty fees. You will, however, have to pay taxes on your capital gains and dividends. How much you pay depends on how long you’ve held an investment and the tax bracket you are in. If you’ve held your investment for less than one year and ended up selling it, you will pay a higher capital gains tax rate compared to if you owned your investment for longer than on year.

Self-employed citizens don’t have access to a 401k, but they can setup an investment account called a Keogh plan, which is similar to the 401k.

Also, the latest kid on the block is the myRA account, this is a type of savings account backed by the government. You can open an account for free and start adding as little or as much as you can afford.

Chapter Four: Let’s analyze investments

If you are trying to figure out which funds to invest in, a good place to start is to see what different funds your 401k is offering. Below is a list of a sample of funds you might see in your 401k to choose from.

Table 4.1 401K Investment Examples

We’ll analyze the two funds in gray. The popular Vanguard 500 Index Admiral (VFIAX) and American Funds Growth Fund Of Amer R6 (RGAGX).

The Vanguard 500 Index Admiral, which is an index fund that mirrors the S&P 500 by investing in the same companies as the S&P 500, is a fan favorite of passive investors.

American Funds Growth Fund Of Amer R6 is a mutual fund that focuses most of its capital on equities, both domestic and international. This fund depends on stocks for growth.

To analyze these two funds we’ll pay attention to fund fees and expenses, turn-over rate, performance, fund manager(s) years of managing the fund, companies invested in, the category of the fund and other noticeable things that might pop up during our analysis. To do our research we will mainly use a couple of sites Msn Money, Yahoo Finance, and MorningStar, with the last one being the most important.

So let’s head over to Morningstar.com and type in the ticker symbol “VFIAX” in the Quote search bar. The ticker is the unique identifier of the fund on the stock market.

Once you do this you will see the following information on the right hand side:

Figure 4.1 VFIAX investment attributes. Source Morningstar.com

The expenses are extremely low for this index fund. Keep in mind that expenses come out of your investment and this is what you pay yearly. This however is not the only fee you pay. If you had a portfolio of $100,000, a 0.05% expense ratio will come out to $50. If your investment increases or even decreases, you will still have to pay the 0.05% expense ratio. Always try to keep your expenses low, because that’s money that could’ve been used to invest and grow your wealth.

Turnover stands for the amount of buying and selling of equities, fixed income, or other assets. The higher this number, the more frequent buying and selling takes place. Fees, like transaction fees, are associated with turnover and guess who pays for it….you do!

A 3% turnover rate is also extremely low.

The minimum amount to start investing in this index fund is $10,000, but if you have this fund in your 401k, this minimum does not apply. However, if you want to invest in this index fund in your traditional IRA or Roth IRA and don’t have $10,000 in capital, you can start with the fund VFINX. You can start investing in this fund with only $3000, but the expense ratio is a little higher at 0.16%.

The investment style is focused on large cap stocks with a blend of growth stocks and value stocks. This means that the focus is placed on big multinational companies that are worth over $10 billion. These companies can either experience massive growth, like Facebook and Tesla, or they might focus on more established value companies that pay out dividends. Value companies in this category include Johnson & Johnson and Proctor & Gamble.

Figure 4.2 VFIAX Asset Class description. Source: Morningstar.com

In chapter 2 we discussed the 4 asset classes: equities, fixed income, cash, and other. This index fund is heavily invested in equities (both US stock and non US stock) and less than 1% invested in cash.

Table 4.2 VFIAX Top 25 Holdings

It’s always important to know which companies you are invested in. Morningstar shows us the top 25. You also see the portfolio weight by company, which tells you what percentage of the capital is invested in the company, with 100% being the total.

For example, if you had $10,000 invested in VFIAX, 3.17% or $317 would be invested in Apple, 2.39% or $239 of your $10,000 would be invested in Microsoft, etc. Now if Apple goes down in value only that 3.17% of Apple portfolio weight will be affected.

Figure 4.3 VFIAX fund managers. Source: Morningstar.com

Under the management tab you can get information about the fund managers who are currently managing this particular index fund. It is important to look at this information, because these are the people managing your money, which you have worked hard for. What I’m looking for is experience, I like to see fund managers who have been managing the same fund for at least five to ten years. Now in this case it shows us that Mr. Buek has been managing investment portfolios since 1991. The VFIAX, however, was setup in 2000, but Mr. Buek already had 8+ years of managing portfolios prior to managing this investment, so this investment gets two thumbs up.

The last thing I check for is 5 to 10 year performance of the fund. I do this in Yahoo Finance, but you can also do this step in Morningstar.

In Yahoo Finance you need to enter the ticker in the search bar, next step is to click on the interactive chart in the left menu. On the chart I add the benchmark, which in this case is the S&P 500. Always remember to compare apples to apples. Since VFIAX is tracking the S&P 500, this is the only benchmark you should use.

Figure 4.4 VFIAX performance compared to benchmark. Source: Yahoo Finance

In the image I chose a 2 year date range to show you how close the fund is tracking the S&P 500. The blue line is VFIAX and the red line the benchmark (S&P 500). It’s pretty spot on.

Now let’s analyze our second fund American Funds Growth Fund Of Amer R6, by typing searching the ticker symbol RGAGX. This is what you’ll see:

Figure 4.5 RGAGX investment attributes. Source: Morningstar.com

First thing you immediately notice is that the expense ratio is a lot higher compared to the previous fund we analyzed. The turnover rate is also a lot higher. The only thing that is lower is the minimum needed to invest in the fund. This is a fund that focuses on large cap companies that are geared for growth.

Figure 4.6 RGAGX Asset class description. Source: Morningstar.com

The Asset allocation is a little bit different, but still focused highly on equities (90%+). Cash assets are at 6.67%. Fund managers have different philosophies on cash. Some like to have less cash on hand and would rather be invested in the market. Others like to have cash in case the right opportunity presents itself to make their shareholders richer.

Table 4.3 RGAGX top 25 holdings

The top 25 companies are highly focused on information technology. A lot of these companies don’t pay a dividend; they instead take their earnings and invest it back in the company.

Figure 4.7 RGAGX performance compared to benchmark. Source: Yahoo Finance

If you look at who is assigned as a manager of this fund you will see a list of names. This is interesting, because you can see how this mutual fund (blue line) has performed against the benchmark (red line). This fund has been underperforming the market for a couple of months. I pulled a two year chart to emphasize the difference in performance, but you can also look at the 5 or 10 year performance and you will see that this fund is one you want to stay away from based on their past performance.

Keep in mind that not only is this fund underperforming the market, you also pay a higher fee and have to deal with a higher turnover rate.

Chapter Five: Investing for the long run

The amount of risk you are willing to take and the number of years you have left to invest will determine your investment strategy. Usually, younger people are more risky, because they can afford to be. If they lose money, they can always bounce back because they have time on their side. People closer to retirement want to focus on less risky investments that keep their money safe which they can withdraw from, like dividend paying stocks, bonds and annuities.

So, if you’re early in your career life and have access to a 401k, you should check out the target date retirement funds available to you. If these are not available, see if there are any index fund options. You can also check out the mutual funds, but make sure you analyze their performance. With a 40k you’re always limited to fewer options.

If you don’t have access to a 401k at work, you can open an IRA or Roth IRA account. You can do this at the bank or a brokerage firm, both online or offline.

Online brokerage firms where you can open your retirement account:

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p<>{color:#000;}. Scottrade

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p<>{color:#000;}. TradeKing

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p<>{color:#000;}. TD Ameritrade

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p<>{color:#000;}. E-trade

Figure 5.1 Rebalancing of investments

As an investor just starting out, I would be heavily focused on equities (stocks) that have the potential to grow my wealth fast. I would be as aggressive as putting up to 90% in stocks. This would be in my twenties and thirties.

Even in my forties I would still be heavily focused on growing my investments. Once I start hitting 50 and up, I would start rebalance my portfolio to focus more on fixed income assets.

Now, like I said earlier a target date retirement fund would take care of the rebalancing throughout the years and I would only have to keep an eye on it from time to time, but I like investing in index funds which will keep my overall cost lower.

Diversifying my portfolio between stocks and bonds is a good start, but what about diversifying my stock portion of the portfolio with international stocks? That’s not necessary; because many of the US companies generate a significant portion of their revenue and earnings from foreign countries. So investing in an S&P 500 index would already give me that global diversification I’m looking for.

Now, if I still want to invest in companies outside of the US, I’ll make sure it is a small portion of my portfolio. I wouldn’t go higher than 15-20% and even less in my retirement stage. The only fund I would consider would be the Vanguard Total International Stock Index Fund Investor Shares ( VGTSX).

For domestic stock funds I would stick with the Vanguard 500 Index Fund Admiral Shares (VFIAX), Vanguard High Dividend Yield ETF (VYM), or Schwab US Dividend Equity ETF (SCHD).

For stability I would invest in the Vanguard Total Bond Market Index (VBMFX) or the Fidelity Total Bond (FTBFX), which both are bond funds that invest mostly in US Treasury notes. If I want to be a little bit riskier I could go with the Vanguard Shrt-Term Inf-Prot Sec (VTIPX) or the Fidelity High Income (SPHIX)

Chapter Six: Beware! Things not to do

It’s common to make mistakes, especially when you start investing. Make sure you prevent yourself from making any of these mistakes.

Don’t be in the dark about what you are investing in

Always try to find out what you are investing in. In our example we looked at the top 25 companies in the funds. Many people have gotten scammed by what they believed where reputable companies or people. Be careful about investments that sound too good to be true, especially if you hear about a “hot stock” that will make you a ton of money fast.

Don’t neglect your fees

Always do your due diligence to find out what fees and expenses you are paying. Some fees are hidden, but at the very least you should know your expense ratio if you buy mutual funds.

Don’t be intimidated by jargon

Having access to the internet and the library makes it easy to uncover some of the jargon used in the investment community. Sites such as Investopedia and even Youtube can be used to make sense of investing lingo.

Don’t stop contributing

Always contribute whatever you can to your retirement account. It would be even better if you set up an automatic transfer of funds to your retirement account, which will allow you to not even have to think about contributing toward your future.

Don’t put it off

You will never be able to guess what the best time will be to get started investing for your future, so start now. If you are young, don’t worry too much about what the market is doing on a daily basis, because you have the gift of time on your side.

Don’t think you don’t have enough to get started

You can start with what little money you have in your pocket. You don’t need a lot to get started. Setting aside just 10 dollars a week will give you $520 at the end of the year to get started.

Don’t do it alone

Investing can seem scary and complicated, that’s why it’s good to educate yourself and even ask for help if you need it. If you feel completely lost about your 401k, ask HR for help. You can also reach out to a financial advisor.

Don’t panic

Whatever you do, don’t panic. Whether your just starting out and trying to figure out how much money you need to put to the side, you’re getting older and noticed that you won’t have enough saved up for retirement, or you just lost a good portion of your portfolio in a market crash, always stay level headed. Chances of you making great mistakes increase if you are not thinking with a clear head.

Chapter Seven: Conclusion

Taking responsibility for your retirement is a big step in the right direction that doesn’t have to be confusing or scary. The golden rules are to start as young as possible, keep contributing to your retirement accounts, watch your fees, and rebalance your portfolio when necessary.

Along the way there will be ups and downs, you should expect these and not shy away from them. Just remember to stay focused on your journey toward retirement.

Thank you

I would like to thank you from the bottom of my heart for coming along with me on this investing journey. There are many investing books out there, but you decided to give this one a chance.

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Investing for Beginners: Steps to financial freedom

Are you feeling stressed out over your financial future? Are you tired of feeling frustrated and confused about investing in general? You might also think you don’t have enough money saved up to start investing. You’re not getting any younger and saving money for your retirement is not going to get any easier. There is too much information available about investing and it’s either too complicated or too boring to take in. You also have to be very careful who you trust with your hard earned money, because the last thing you want is to get swindled by any of these financial con men or investments that will make you go broke. However, it’s time you take control of your financial future, because no one else will. You deserve a stress free and exciting life where you don’t have any worries about money or where it’s going to come from. You should be able to spend your leisure time doing the things you love and enjoy, like going on long vacations in exotic countries, spending quality time with your significant other, swimming, hiking, bike riding or anything you always wanted to spend more time doing. I’ll show you the steps to financial freedom. I go over the basics that you need to know about investing, but I also show you how to analyze investments. You will also learn some of the lingo and financial jargon, which gives you the knowledge and confidence to make the right decisions, whether you invest alone or when talking to a financial adviser. Right now the book is available for free, but this promotion will end. So don’t hesitate and get the book now!

  • ISBN: 9781311646057
  • Author: Giovanni Rigters
  • Published: 2016-04-19 06:05:13
  • Words: 6601
Investing for Beginners: Steps to financial freedom Investing for Beginners: Steps to financial freedom