Investing 101
2020
Allison Barr Allen
Introduction
Why should you invest?
Power of Compounding
Volatility
How to Get Started: Investing 101
Common Terminology
Account types
What to look for in a fund
Lowest cost way to invest
Taxes
Q&A
Table of Contents
Disclaimer
I am not a Certified Investment Advisor
This is information based on personal research and experience. Please do your own independent research and / or consult a Financial Advisor as you see fit.
This is focused on US retirement account structures & taxes.
Overview
My Story
What do you think about when you hear “investing”?
First thing’s first…..Why should you care?
1.1%
Bonds
1914 - 2014
(adjusted for inflation)
.09%
Average Savings Interest Rate
(0.01% - 2.0%)
1.81%
2019 Inflation
Overview
Annual Market Returns
8.3%
S&P 500
1914 - 2014
(adjusted for inflation)
Talk about what is S&P 500 and Dow Jones
Sources
S&P: https://dqydj.com/sp-500-historical-return-calculator/
Dow Jones: https://dqydj.com/dow-jones-industrial-average-historical-return-calculator/
Inflation: https://www.google.com/search?q=2017+inflation+rate&oq=2017+inflation&aqs=chrome.0.0j69i57j0l4.2330j0j7&sourceid=chrome&ie=UTF-8
Source: https://www.cibcwg.com/c/document_library/get_file?uuid=82cfb962-f88a-4969-8e25-bda4b01dede3&groupId=109423
Overview
Power of Compounding
Saver
Monthly Investment
Number of Years Invested
Ending Balance
Michael
$1000 @ 7%
45 - 55
$1,444,969
Jennifer
$1000 @ 7%
35 - 45
$734,549
Sam
$1000 @ 7%
25 - 35
$373,407
https://www.moneyunder30.com/power-of-compound-interest
Overview
Caveat: Volatility
https://www.macrotrends.net/2324/sp-500-historical-chart-data
You must remain calm when the news is talking about Doomsday Scenarios & long-term recessions.
These are generally the best times to invest!
Doesn’t mean the 9.8% earnings is guaranteed. Timing matters, risk matters, economy matters
How to Get Started
Overview
Common Terminology
Term
Definition
Examples
Stocks
Stocks allow you to own a portion of a public corporation. The owners sell control of the company to stockholders to gain additional funds to grow the company.
Google (GOOG), Disney (DIS)
Bonds
Bonds are loans made to large organizations. These include corporations, cities, and national governments. An individual bond is a piece of a massive loan.
Treasury bonds (gov’t), Corporate bonds
Mutual Funds
A mutual fund is a collection of stocks, bonds, or other securities. When you buy a mutual fund, you own the share of the mutual fund. The price of each mutual fund share is called its net asset value (NAV)
Vanguard Total Stock Market Index Fund ($VTSMX)
Index Funds
An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index
S&P 500
Exchange-Traded Funds (ETF)
A marketable security that tracks a stock index, a commodity, bonds, or a basket of assets. ETFs differ from mutual funds because shares trade like common stock on an exchange.
SPDR S&P 500 (SPY), Vanguard Total Stock Market ($VTI)
Inflation
The increase in the prices of goods and services over time. The percentage tells you how quickly prices rose during the period.
1.26% (2016), 2.13% (2017)
Bonds: https://www.thebalance.com/the-returns-of-short-intermediate-and-long-term-bonds-416970
Retirement Accounts
Accounts that have tax benefits designed to help you save for retirement
To oversee your account, your employer usually hires an administrator:
Investing 101
What are Different Ways to Invest?
Brokerage Accounts
Robo-investing
Arrangement between an investor and a licensed brokerage firm permitting the investor to deposit funds with the firm and place investment orders through the brokerage
Companies that provide digital financial advice based on mathematical rules or algorithms
Top recommendation
http://guides.wsj.com/personal-finance/retirement/what-is-a-401k/
Investing 101
Retirement Accounts - Can’t withdraw until 59 ½ (without penalty)
Employee retirement savings plan
Contribution Limit - $19,500 in 2020
Individual Retirement Account (not sponsored by employer)
Contribution Limit - under age 50 you can contribute up to $6,000 in 2020
Roth IRAs have income limits
401K
IRA
Roth
Categorization of retirement account. Contributions to retirement accounts are post-tax
e.g. You pay income taxes on the funds NOW, then you don’t pay any taxes when you take distributions
https://thefinancebuff.com/401k-403b-ira-contribution-limits.html
Investing 101
What to look for in a fund?
Good
Not as Good
Index funds (Passive - e.g. traders aren’t picking individual stocks)
Tracking S&P 500
Low cost - An ETF like $VTI has expense ratio of 0.04% per year
Direct Investment - Ideally no extra yearly management fees in excess of the fund fees
Actively managed funds (e.g. humans picking things)
Fund-of-funds (a fund manager is paid to invest in other funds that have fees)
Anything with high expense ratios
Anything with hidden fees (often annuities)
Choosing lots of different funds - this doesn’t make you more “diversified” or “less risky”. An S&P 500 Index fund is globally diversified
Anything people are actively selling you
Investing 101
How to get started - the CARE Investment Framework
Step
Description
Examples
1
CASH - Ensure you have enough cash for 3-6 months of living expenses. This is your Emergency Savings account.
Goldman Sachs Marcus Account (0.6%)
2
ARREARS - Create a spreadsheet with all loans & debts, and pay off all debt with APR > ~7% before moving onto the next step
High interest credit cards
High interest student loans
Personal loans
3
RETIREMENT - Set up your Corporate Retirement Account (if you choose). I recommend 10%+ of your salary. You will thank yourself later!
S&P 500 or Target Date Funds
4
EXTRA - If you have extra savings, you can invest it in a Brokerage Account.
Either ETFs or Target Date funds through Ameritrade or Vanguard
Step
Description
Examples
5
If you want to invest in individual stocks, this can be fun but more risky. I recommend less than 10% of total assets. Invest in products that you regular use & love.
Robinhood or Ameritrade for no transaction fees
6
Real estate - Can be a great investment, but don’t forget to add up the fees! E.g. $10k for closing costs, maintenance costs, not as liquid, etc. Down payments are generally 20%
N/A
7
Angel investing - The most risky. Your assets are not liquid (can’t be easily accessed by you), and you could lose it all. I recommend <10% of total assets.
Your friend is starting a company and you want to invest (Typically $5k to $25k checks)
8
Crypto - Along with angel investing & individual stocks, I would recommend less than 10% of total assets
Investing 101
Investing 101
Taxes
You don’t pay tax upfront ($ that goes into your account is pre-tax)
You pay Income Taxes when you withdraw from the account.
You do pay tax upfront ($ that goes into your account is post-tax)
You don’t pay taxes on the distributions (capital gains)
401K / IRA
Roth
Brokerage Accounts
Short-Term Capital Gains - If held less than a year, Capital Gains (the difference between your starting price and the price you sell at) are taxed at regular income tax rates
Long-Term Capital Gains - If held > 1 year, taxed up to 20% based on income
You only pay taxes on Dividends, unless you sell your stocks (Unlike Real Estate, you don’t pay annual taxes on what you own).
The best investing is VERY boring.
Invest for Years, not Days.
Investing 101
Personal Capital for tracking all of your different accounts & returns
EasyInvest Newsletter Resources
Warren Buffett Shareholder Letters
Resources
Q&A