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