The Building Blocks of Investing

Who says you can’t grow MONEY?

Investing Basics

• Stocks, bonds, mutual funds: What are they and how do they work?
• Risk tolerance: Understanding your comfort level with investment risk
• Diversification: Why it’s important and how to do it
• Long-term investing strategies: Building wealth over time

Investing Basics: Your Path to Building Wealth

Now that we have covered the concept of compound interest (Finally, It’s time for Money Talk! Have you heard about the 8th Wonder of the World?) and how the rich make their money work for them, I am sure by now you’ve got the ball rolling in your own life, have a little bit of money saved up, and are ready for the next step to continue to grow your capital and be able to do things you’ve always dreamed up. To achieve those dreams, we will need to dig just a little deeper and grow our knowledge a bit more.  Investing can seem intimidating, but understanding the fundamentals is crucial for building long-term wealth. Once you learn it, you can build on it and pass it down to those you care about, who may not know these tips to get the most out of life and every dollar – to me, that’s invaluable and well worth the effort. This post will break down the basics of common investing terms, focusing on stocks, bonds, mutual funds, risk tolerance, diversification, and long-term strategies. This guidance will be more suited for the majority of people and for most of your money — so it will be conservative (less aggressive) where we want to protect our hard-earned dollars and beat the inflation rate and the market, too!

Let’s Begin, shall we? Stocks, Bonds, and Mutual Funds: What Are They and How Do They Work?

• Stocks: When you buy a stock, you’re buying a tiny piece of ownership in a company. If the company does well, the value of your stock can increase. You can also receive dividends, which are payments made to shareholders from the company’s profits. Stocks offer the potential for high returns but also come with higher risk- think of popular companies like TSLA (tesla), NVDA (Nvidia), AAPL (Apple), NFLX (Netflix), DIS (Disney), MCD (McDonalds), JPM (JPMorgan Chase) etc etc etc, you get the point. Any major company you can think of, you can purchase ownership (stock) in it and profit when it makes money!
• Bonds: Now, Bonds are essentially loans you make to a company or the government. They pay you interest over a set period, and at the end of that period (the maturity date), you get your original investment back. Bonds are generally considered less risky than stocks but offer lower potential returns. Think of these almost like a bank CD or a bank savings account that pays you higher interest. They can be almost risk-free if the company is large and financially strong or, in the case of the US government, has the world’s biggest military to support it. Avoid lower-grade bonds or junk bonds that pay a HIGH interest rate. They have to pay a high rate to attract investors because their company is on shaky footing and might not be around long enough to pay back YOUR original investment. Now, any company can go bankrupt, which is why it’s not totally risk-free, but it’s highly unlikely for a fundamentally sound company to fail overnight.
• Mutual Funds: A mutual fund is a collection of stocks, bonds, or other assets managed by a professional. When you invest in a mutual fund, your money is pooled with other investors’ money to buy a diversified portfolio. This offers instant diversification and professional management, which can be beneficial, especially for beginners. Mutual funds have associated fees, so be sure to research those before investing. You will see mutual funds in your 401(k), 403(b), or any other retirement/ pension plans sponsored by your company.

Next Up? Risk Tolerance: Understanding Your Comfort Level

Your risk tolerance is your ability to handle fluctuations in the value of your investments. Are you comfortable with the possibility of losing some of your money in exchange for the potential for higher returns? Or do you prefer a more conservative approach with lower potential returns but less risk? This choice is 1000% personal for each person and will shape the strategy you use regarding which investment vehicle(s) from above you will use for your wealth-building endeavor. You must remember we are playing the probabilities, and NOTHING can be guaranteed. Taking appropriate risks for appropriate rewards is key.

• Factors influencing risk tolerance: Age, financial goals, time horizon, and personal comfort level all play a role. Younger investors with a longer time horizon often have a higher risk tolerance, while older investors closer to retirement may prefer a lower-risk approach.
• Assessing your risk tolerance: Consider how you would react to a significant drop in the market. Would you panic and sell everything, or would you be able to ride it out? Online risk tolerance questionnaires can help you gauge your comfort level.

Diversification: Why It’s Important and How to Do It

Diversification is a strategy that involves spreading your investments across different asset classes (stocks, bonds, real estate, etc.) and within each asset class (different companies, industries, etc.). The purpose of diversification is to reduce risk so that one bad event can’t wipe us out and kick us out of the game. We have to live to “fight” another day! We assure this by diversifying and taking the right amount of risk for each position.

• Why diversify? If you put all your eggs in one basket (invest all your money in a single stock, for example), and that basket breaks (the company performs poorly), you could lose a significant portion of your investment. Diversification helps protect you from this by ensuring that if one investment performs poorly, others may balance it out.
• How to diversify: You can diversify by investing in mutual funds (which are already diversified), or by creating your own diversified portfolio by investing in a mix of stocks, bonds, and other asset classes. Consider diversifying across different sectors, industries, and even geographies. You will quickly learn that you can invest in just about anything! When we learn about futures you’ll find out this includes lumber, cattle, hogs, foreign currency(forex), US stocks, Asian, London, German markets, orange juice, coffee, gold, silver, platinum, wheat, corn, soy – pretty much anything!

Long-Term Investing Strategies: Building Wealth Over Time

Investing is a marathon, not a sprint. The key to building wealth over time is to adopt a long-term perspective and stick to your plan. If you’re unsure about how to invest or need help creating a financial plan, consider consulting with a qualified financial advisor- just make sure they are a fiduciary. This means by LAW they are legally and ethically bound to act in your best interest. Instead of steering you towards an investment where they get a big commission, they will choose the best for you and your goals not theirs.

• Dollar-Cost Averaging: This strategy involves investing a fixed amount of money at regular intervals, regardless of market fluctuations. This helps you buy more shares when prices are low and fewer shares when prices are high, averaging out your investment cost over time.  
• Rebalancing: Over time, your portfolio’s asset allocation (the mix of stocks, bonds, etc.) may drift due to market performance. Rebalancing involves periodically adjusting your portfolio to bring it back in line with your target allocation. This helps you maintain your desired level of risk and can also help you buy low and sell high. I would aim to rebalance your account at least on a quarterly (3 months) basis. This will keep you involved and teach you how your investments respond to different market conditions so that in the future, you have a playbook when the same type of environment or conditions inevitably reappear again—think high or low inflation—the Fed cutting or raising interest rates. Remember, markets move in a cycle (like a Sine chart or heartbeat EKG), and patterns often repeat. After all, it’s driven by human emotion, and humans haven’t changed much in the last 100 years. We are still driven by our emotions, particularly fear and greed when it comes to our money!
•  Stay invested: One of the biggest mistakes new investors make is trying to time the market. Market timing is extremely difficult, even for professionals. It’s generally better to stay invested long-term and let the power of compounding work its magic. Later down the road, once you have some real money to play with from following these investment principles. I can share some strategies on how you actually CAN time the market and make high-probability bets on a near-consistent basis. But this only comes with the experience of following the markets daily, paying your market tuition 😉, and learning about your own emotions and psychology.  Timing the market might sound simple; however, if it were easy, everyone would be a millionaire already. So, for now, we’ll take it slow and focus on setting up a safety net for just in case, getting a jumpstart on our retirement, and then building up our capital to reach our dreams.

Investing is a journey; starting early and staying consistent is essential. By understanding the basics of stocks, bonds, mutual funds, risk tolerance, diversification, and long-term strategies, you can take control of your financial future and build wealth over time. —For our next discussion on wealth creation over time, I think it’s appropriate to discuss the importance of home ownership and how that fits in with our goals. Until next time, keep compounding!