David Salazar June 21st 2019 Wealth MODs 101

• Wealth MODs 101
• The Ultimate Guide To Investing

Over the last decade, it seems like everyone is making money by "investing." It probably feels like you are being left out and you want in, but you don't know how or where to start. It can be overwhelming in the age of "information overload," because chances are, you've heard phrases like:

"You need to diversify."

"You need your money to start working for you."

Or my personal favorite, "You need to buy low sell high."

It is excellent advice if you understand how the market works, but if you are an absolute beginner and you've never put money in the stock market before, it could affect your financial health – especially in this geo and socio-political climate.

Let's start with something that hurts:

The Truth

The truth is that you will not get rich overnight with investing. You might think that is obvious, but you will be surprised how many people believe that if they choose the right stock or if they implement some day trading strategy they read online, they will obtain wealth! The truth of the matter is, 95% of people that trade stocks lose money.

"Wait, what?"

You heard me. 95% of traders lose money, and the funny thing is new research says the number is even higher.

"Is this article trying to convince me not to invest?"

No. In fact, quite the contrary. I just wanted to let you know that there is a difference between investing and trading. Investing is a process, and it takes time to build wealth. Ben Graham the "father of value investing," and Warren Buffett's teacher has a great quote that everyone should know –

"The individual investor should act consistently as an investor and not as a speculator."

So what the heck is Investing?

Investing is the allocation of money into an asset with the expectation of a future benefit. In other words, the way investors build long-term wealth is by purchasing an asset and receiving a return over time.

There are many ways to invest your time and money. For instance, you can purchase real estate or art with the intent to sell it at a higher value than what you bought it for. Your investments can be tangible or intangible (such as stocks and bonds). But for the sake of time, this article will only be addressing investments in the stock market.

If you are brand new to investing, there is going to be some financial jargon that you may hear or read that sounds unfamiliar. It's tough to feel confident about investing your hard-earned money in assets like stocks, mutual funds, ETFs, and bonds if you don't know what they are and how they work. But don't worry, nobody knows at the beginning!

Investing Jargon 101:

Asset Class

An asset is anything that has economic value. Investors buy and own assets with the expectation that it will gain in value in the future, also known as a "return." There are four different classes of assets that investors can own; Equities, Fixed Income, Cash Equivalents, and Alternative Investments.

Equities

There are several types of equities, but when investors and financial advisors are talking about equities, they are more likely talking about shareholder equity, like stocks.

Stocks are tiny pieces of ownership of a company, also known as shares. Investors that own stocks or shares are known as stockholders/shareholders. When a company does well, the value of the share increases – however, if the company doesn't perform well, the value of the share decreases.

Hence why investing in Equities can be risky when compared to Fixed Income Investments.

Fixed Income

A fixed income investment provides fixed periodic interests payments during a specific amount of time. Hence why it's called "fixed income." The most common type of fixed income investments are Bonds.

A bond is a loan made by an investor (you) to a borrower (government or corporation). Bonds include details on:

• Principal – The original amount borrowed, also known as face-value.
• Maturity Date – The day they will pay back the principal.
• Coupon Rate – The annual interest rate that determines the interest payment.
• Payment Frequency – How often you get paid (monthly, quarterly, semiannually, or annually).
• Bond Rating – Also known as credit quality, this is like checking the bonds credit score. It is crucial to find out how likely the borrower will pay you back.

Bonds tend to be safer than stocks, but they usually don't generate higher returns than stocks. The safest asset class is Cash Equivalents

Cash Equivalents

Cash equivalent investments are amongst the safest type of investments, super high credit quality, and are very liquid. I'm only going to share three of the most common type of cash equivalent investments because they are the most accessible to you the investor:

• Certificate of Deposit (CD) – It's basically a written promise from the bank that says, "if you deposit money into the account, we will pay you interest." The catch is that you are not allowed to liquidate (take out) the money until a certain period as stated in the note. The interest is not as high as a bond, but a CD is safer because they are typically insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per individual. Like Bonds, a CD has a maturity date, interest rate, payment frequency, and payment date.
• Treasury Bills – Also known as T-Bills are issued and backed by the United States Department of Treasury. They have a maturity date of one year or less. They do not have an interest rate, but they are offered at a discounted price. For example, you can invest in a $1,000 T-bill for $999 that matures in two weeks. After two weeks you get paid back $1,000 instead of $999. That is a $1 return!
• Money Market Accounts – Also known as MMAs are like checking accounts that offer higher interest rates than your traditional savings. They also provide insurance protection as well. Most come with check-writing and debit card privileges. However, there may be fees, and minimum balance requirements, and they could have limited transactions. Most Brokers and Banks offer MMAs.

Time for the last asset class:

Alternative Investments

Alternative Investments include but are not limited to Real Estate, Commodities (such as gold and silver), private equity, venture capital, hedge funds, and even collectible items. For the sake of being beginner friendly, we are going to avoid talking about alternative investments because they are usually held but institutional investors, they are complicated by nature, lack regulation, and often very risky. However, I will talk about to get some exposure to these sorts of investments without the headache that comes with it.

Now that you know what the main asset classes are, let's talk about the primary way long-term investors build wealth over time.

Diversification

Diversification is a strategy used by investors to manage the risks involved in managing a portfolio. The basic approach is to invest in different kinds of asset classes that perform inversely to market influences. This will result in a less volatile portfolio – meaning it will smooth out the chaotic up and down movement in your portfolio.

It's the "Don't put all your eggs in one basket" strategy. By not investing all your money into one particular stock or asset class, you mitigate the risk of losing everything.

"So how do I know which investments to choose to make sure I'm diversified?"

There are investment vehicles out there that help you diversify – Mutual Funds, ETFs and Index Funds.

Mutual Funds

A mutual fund is an investment vehicle made up of a pool of money composed by many investors (you) to invest in equities, fixed income, cash equivalents, and alternative investments. Mutual funds are managed by professional money managers (for a fee), who allocate the fund's assets and attempt (key word is attempt) to yield a return or income for the fund's investors. The portfolio is structured in a way to maintain the investment strategy and objectives stated in its prospectus (brochure).

Mutual funds were created to give smaller investors access to professionally managed portfolios of different kinds of asset classes. Hence each shareholder takes part in the gains or losses of the fund proportionally to what they invested.

Exchanged-Traded Funds (ETFs) and Index Funds

Like mutual funds, ETFs (Exchange-Traded Funds) and Index Funds are investment vehicles made up of money composed by many investors to invest in equities, fixed income, cash equivalents, and alternative investments. But unlike mutual funds, they're not typically actively managed by professional money managers.

Alternatively, Index Funds are designed to track market indices, like the Dow or the S&P 500 index. A market index represents a collection of stocks that are used to track the performance of an area of the market. For instance, the S&P 500 Index tracks the 500 largest publicly traded companies in the United States.

ETFs, on the other hand, can be a collection of stocks that might share a specific measure including but not limited to:

• Similar Industries
• Geographical Locations
• Market Capitalization – the total amount of shares available of the company in dollars

ETFs and Index Funds are typically much cheaper than Mutual Funds since they are not actively managed, but that is not necessarily a bad thing. Just ask Warren Buffet on $1,000,000 on passive investments over active investments.

How Do I Get Started With Investing?

The answer to this question varies depending on your:

• Financial goals – Retirement, buying a house, going back to school, vacation, etc.
• Risk Profile
• Capacity to take financial risk – The level of Financial Risk you can take
• Tolerance to financial risk - The level of Financial Risk you are emotionally comfortable with.

If you feel like you need to have a whole lot of cash to start investing, you are wrong! Even if you can manage to scrape $100 as your initial investment, that is enough. Have you ever considered using Acorns ?

If you are anything like me or have some sort of weird OCD, and you are filling up your tank of gas, and it stops at $39.17, don't you just wish you can round it up to $40? Well with the "round up" feature in an Acorns Account, 83 cents get invested systematically, and the app takes care of all of that for you!

If you just want to get started with spare change then click here to sign up to Acorns today and you will receive $5 into your account! The most important step is always the first one.

There is also a budgeting method out there that shows you how you can save money and still enjoy your life as well.

Nevertheless, if you want to be able to start owning these types of investments, you need to open an investment account. Let's get started with the types of accounts that may be available to you:

• Employer-Sponsored Retirement Plans – As stated in its title, they are retirement plans that may be offered by your employer, such as a 401(k). They have substantial tax-saving benefits, and they sometimes provide a match – that just means your employer will match what you put in – to a certain extent.
• Individual Retirement Accounts (IRAs) – These are portable retirement accounts that are not associated with an individual's employer. They offer tax-saving incentive and benefits as well:
• Traditional IRAs – Contributions are tax deductible but taxed when you withdraw money
• Roth IRAs – Contributions are taxed today, but earnings are tax-free
• Individual Accounts – May be known as an Individual Taxable Brokerage Account as well. This account doesn't provide a tax-saving incentive. You may be subject to different taxes upon selling an investment depending on how long you've held the investment.

Where Can I Open an Investment Account?

For individuals that don't have access to employer-sponsored retirement plans, you can still have access to IRAs and Individual accounts from Brokerage Firms or Banks.

If you are looking to consolidate all your financial accounts to one place, maybe choosing your bank is the right thing to do. You can see all your information from your profile dashboard when you log in. However, banks typically target high net-worth individuals so they might not be actively searching for you. You may still participate in their investment services if you meet their requirements and if you are comfortable with the fees.

Brokerage Firms offer similar investment services but operate in a different business model. They are the middleman between the seller and the buyer to enable a transaction. They are paid by a transactions fee (commission) every time an investor buys and sells an investment. Investors have a wide array of brokerage companies to choose from, and every brokerage firm has a different set of policies and fees. They are made for the Do-it-Yourselfers.

MODs For Success

Now that you've at least heard some of the jargon used by investors and now acquainted with the available investment options, there are a couple if MODs out there that will help you succeed.

Due Diligence Is Key

Whether it's family, friend, or colleague, always do your due diligence before placing all your bets into something they suggest. They may be genuinely looking out for your best interest but remember, what can be useful for them, may be detrimental to you. There is no "One Size Fits All" type of investment.

Before you hire a financial advisor, do a full background check before hiring one. This is a free tool to research the background and experience of financial brokers, advisors, and firms.

Get Acquainted With Risk

Risk, in the investing context, refers to a level of uncertainty. Beginner investors need to understand that risk and reward go hand in hand. Meaning the higher the level of risk (uncertainty), the higher the return potential and vice versa. Risk is also associated with volatility – the big random up and down swings in the market.

Knowing your emotional tolerance and capacity to take risk in vital because of volatility. If a person with a low-level tolerance to risk invests in a risky investment, the first down-swing or market correction might cause the person to sell out too early and miss out on potentially high returns.

Every investor has a different level of risk tolerance, and that's okay. That's why it's important to choose investments that correlate with your risk profile, or it can be detrimental to your financial goal. I'm a firm believer in enjoying the journey towards your financial goals. So why invest in something that causes you to stress out?

Stay Calm When Markets Are Rough

You have to remember that building wealth takes time and you're in it for the long haul. Market volatility happens every day! You might read scary click-bait headlines or tweets that lure you to take all your money out, but at the end of the day you must have perspective:

• Know what your risk profile is
• Diversify your investment holdings that correlate with your risk profile
• Know that time is on your side

Rightfully choosing the right investments takes a substantial amount of planning. If you don't have time or you are unsure about how to even begin, get in touch with your Financial Advisor to help you out with your current situation or feel free to reach out for tailored advice.

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