Introduction:
- The $0.13 you made in your savings account last year is not coming close to you.
- Your money goals.
- Consistently investing over the long term is the only proven way to meet your financial goals.
- Goals and building wealth.
- But learning to invest as a beginner can be as daunting as learning to speak a new
- language.
- The best way to deal with it is to work on expanding your knowledge.
- In this video, you will learn some of the most important investing concepts you need to know.
- Knowing how to invest your money wisely.
- So, take a deep breath, relax, and let’s get started!
Net Worth:
- Net worth, also known as shareholder equity, is a measure of everything a company owns minus everything it owes.
- In other words, net worth is the value of a company’s or person’s assets, minus the liabilities it owes. Assets and liabilities are the essential components of every company, and they are equally important to the individual investor.
- While an asset is something that has a financial value when owned, liabilities are things that take up resources. Assets can be things like buildings that increase in value over time or provide rental income month after month; while liabilities are things like loans, company trucks, or office supplies, things that you own.
- In the words of Robert Kiyosaki, “Assets put money in your pocket, whether you work or not, and liabilities take money out of your pocket.”
- If a company owns more assets than liabilities, it is said to have a positive net worth.
- And this is one of the signs of good financial health and wealth of the company.
- On the other hand, if liabilities are high, it indicates a negative net worth.
- Negative net worth indicates an inability to resolve debts and is considered negative.
- Signal for most investors.
- While we are looking at these concepts from an investor’s perspective on a company, know that net worth is also a great financial number for any individual to track themselves.
- Financial health.
- Your personal net worth can also tell you how well or poorly you are doing financially.
- And show you where you need to improve.
Inflation:
- Another useful piece of information you need to know is inflation.
- The inflation rate.
- Most people associate inflation with just the price of groceries, gas, or the dollar in their wallet.
- In fact, inflation also takes a small bite out of your return on investment, or ROI.
- Inflation, which is a consistent trend of prices rising year after year, also represents the rate at which the real value of an investment erodes over time.
- Inflation tells you exactly how much of a return your investment needs to make.
- To maintain your current standard of living.
- This is why the $0.13 you earned in your savings account isn’t doing you any good.
- To illustrate this, let’s say you can buy a can of organic chocolate milk for $20 per pound.
- This year, the pound is 10% and the annual inflation rate is 10%.
- Hypothetically, the same milk will cost $22 10% more next year.
- So, if your investment doesn’t grow by at least that same 10%, you’re losing money.
- This is why, as an investor, it’s best to buy investment products that have returns that are at or above the inflation rate.
- For example, if your company’s stock returned 9% and inflation is 10%, our real return on our investment will be
- negative 1%.
- This means that we are losing 1% of our money invested.
- This is why diversified investment portfolios are often recommended.
- With equities, bonds, real estate, gold, etc. in a portfolio, you try and hedge against inflation with different investment types so that if one type suffers a bad inflation year, your other investments will hopefully compete and outperform.
Liquidity:
- Liquidity means how quickly and easily you can get your hands on your money whenever you need it.
- In a more sophisticated investment context, liquidity refers to how easily or efficiently an asset or security can be converted into cash without affecting its market value.
- For example, cash is very liquid, you can use it immediately to buy whatever you need.
- A need a house, is a little more illiquid.
- You have to sell it first before you can use the funds to buy something else.
- Liquidity allows you to take advantage of other great investment opportunities because you have
- ready cash and easy access to funds.
- In everyday life, liquidity can be your emergency savings account or cash that you can access in the event of an unexpected event or investment opportunity.
- Having said that, as much as you want to keep cash in your savings account, it is.
- It is also important to invest as much as possible in an investment that will grow the most interest.
- Time It is a delicate balance, but you want to protect against inflation.
- Liquid assets, especially your cash.
Compound Interest:
- Compound interest is the interest you earn on an investment.
- Reinvested, the more interest you earn is often called compound interest.
- Think of it as making money.
- And money that makes money makes more money.
- If that blows your mind, well, it should.
- That’s why Albert Einstein called it the eighth wonder of the world.
- To help you understand how this wonder works, here are Diana and Jackson — two colleagues who got serious about investing for retirement at the ages of 22 and 31, respectively.
- They chose a good growth mutual fund that tracks the S&P 500 with an annual return of 11%.
- Diana invests $2,500 each year and stops contributing money at 31 with the total amount.
- In that time, she’s contributed about $22,000.
- Jackson also invested the same $2,500 each year, but he invested for a full 38 years.
- Total contribution amount of about $95,000.
- By the time he retired at age 69, Diana’s investment had grown to more than $2.3 million.
- Jackson’s had grown by about $1.5 million!
- The initial difference of nine years created a difference of almost $1-million in the portfolios.
- If you haven’t figured it out yet, the power behind compound interest is time.
- And interest rates.
- That’s why it’s so important to start investing early and get a good interest rate.
- The longer your investments last, the more your money earns you because of compounding.
- Interest.
Market Crashes:
- Risk tolerance is your ability and willingness to bear a decline in market value.
- And your level of risk tolerance depends on your financial goals and the pace of them.
- You want to grow your investments.
- To determine the risk tolerance that is right for you, ask yourself, “Will I be comfortable holding this position when the market experiences a big dip?”
- The answer to this question will not only help you maintain an appropriate risk tolerance.
- Level but will also empower you to decide whether to eat well or sleep well.
- On Wall Street, “eating well” means holding a higher-risk asset that brings a significant return, but not without the downside of high volatility and the high risk of losing money that comes with it.
- An investor who loses sleep.
- As an investor, you can choose to go for increased stress or substantially higher returns. Back off and sleep well. However, when your portfolio stresses you out, it may indicate that you are taking on more risk than you can handle.
- To reduce such stress, you can consider reducing the risk on your portfolio.
- But understand that you can never completely eliminate risk as every investment has some form of risk.
- Some form of it.
- Opportunity Cost Since every investment has some form of risk, you want to choose one over the other.
- This is where you need to understand the opportunity cost of such a choice.
- Opportunity cost is the value you give up when choosing between two or more options.
- Options As an investor, you need to understand that your investment choices will always have a future.
- And an immediate gain or loss.
- So you always have to ask yourself “Am I allocating my money correctly?”
- For a legendary investor like Warren Buffett, the true value of any investment is not the amount he paid at the time of purchase.
- Rather, it is the value of the investment that he bought Current Investment – Opportunity Cost.
- Opportunity cost is like the proverbial fork in the road, with something to gain and something to lose.
- In each direction.
- To make an informed decision on this road, you need to weigh the pros and cons.
- For each decision and then stick to one.
Time Value Of Money:
- The time value of money is the concept of the time value of money.
- The value of money now is greater than the same amount in the future.
- This is true because your current cash can be invested and earned back, thus creating.
- A larger amount in the future.
- But why is it valuable?
- Well, when you consider things like inflation and opportunity costs, it can help you figure out if it’s a better idea to spend money now or save and invest later.
- Commodities and commodity prices.
- That’s it for today’s post.
- We hope you learned some investor concepts that you should know when.
- Consider investing your money, especially in the stock market.
- If you liked the post, share it with a friend.
- We’ll see you in it!