Investment Basics: Bonds

Earlier in the blog, I talked about diversification according to risk. There are various ways that you can stack your profile to offset riskier investments, one of those ways is through investing in bonds. If you are like me, you prefer to have a more holistic background of information when researching a topic.  That is why I love this info-graphic made by Mint, telling you what a bond is, how it works, if it is a safe investment, terms to know, how big the market is etc.

This may not be information that is pivotal to your investing strategy, however, this visual representation was helpful for me when I was strategizing how to invest in bonds. When I was starting out, I didn’t know what the difference between a bond and a CD was. A CD is a timed deposit, where you don’t withdraw any funds until the maturity date. CDs are traditionally opened with banks and other financial institutions. Bonds on the other hand, are a debt security. Bonds loan money to an institution which borrows for a defined period of time at a fixed rate. CDs are a less risky investment than stocks, because they are insured by the Federal Deposit Insurance Corporation (FDIC), if the bank is an FDIC member.

Another point that is there are also bonds available across markets, countries, and currencies. As listed in the infographic, the global bond market is a $91.3 Trillion-dollar industry, compared to a $51.8 Trillion-dollar stock market industry. We are living in a global economy where you have opportunities to invest in countries other than your own. As listed, the United States has the largest market, followed by Europe, Japan, the UK, and China. I was surprised to discover that China only makes up 3.3% of the global bond market.

Bonds are also typically less risky than stocks; however, the type of investment that works best for you all depends on your financial goals and risk you are wanting to take. I really like the type of bonds available section of this infographic. Listed, are treasuries, treasury bonds, treasury inflation-protected securities, bills, notes, and other types of bonds. Additionally, it lists the duration of the bond if available and other facts. This really helps you to learn about the different options available for any type of investor.

Sources: https://www.ally.com/cds/cds-or-bonds-whats-the-difference/

3 Costly Beginner Investing Mistakes You Can Avoid

#1 Imbalanced Asset Allocation

Diversification among different investment classes is good, but it is important to remember to diversify in proportion to risk as well. Portfolio diversification is important to protect against market volatility, but risk diversification is important to remember as well. Investing in stocks vs index funds or bonds is a much riskier investment, so rather than splitting your investment 50/50, a tip from the pros is to diversify in proportion to how much risk you are wanting to take, in addition to diversification across investment classes.

There are multiple resources you can turn to for free evaluations of your own asset diversification, including a free evaluation found on this link. Disclaimer, I am not being paid in any way to recommend any sources on this website, including this evaluation through portfolio checkup creative planning. These are simply the resources that I have used and am recommending for other beginner investors, struggling to know who to trust online. This checkup will scan your accounts for extra or hidden fees, poor performance, and other major red flags. The evaluation is quick and provides an online preliminary analysis of investments for free. The link is found here: Portfolio Checkup

 

#2 Using a Broker Instead of a Fiduciary

My husband and I currently have an accountant, but have yet to find a financial adviser. One of the challenges is trying to find a great financial adviser who has by best interests at heart; especially considering this is the person I will most likely work with for several years to come. We have been searching the best way we know how—word of mouth, but if anyone has tips on how to find a great fiduciary that would be much appreciated, just comment below! So why am I specifically looking for a fiduciary, instead of a broker or standard wealth/financial adviser?

For multiple reasons, primarily, that according to the President’s Council of Economic Advisers, using a broker instead of a fiduciary costs Americans one percent point of their return annually! This doesn’t sound like very much, but one measly percentage point can actually lower your savings by MORE THAN A QUARTER, over a 35-year period. Tony Robbins gives the example that this would mean (after adjusting for inflation), instead of a $10,000 retirement investment growing to more than $38,000 in 35 years, the $10,000 investment would return only $27,500. The other $10,500 is taken out in fees–that’s more than the original investment!

#3 Investing without Taxes in Mind

“I have enough money to retire and live comfortably for the rest of my life. The problem is, I have to die next week.”- Anonymous

The third costly beginner investment mistake to avoid is investing without tax efficiency. Taxes can wipe out 30% or more of investment returns if you aren’t watchful. One very important investment tip I learned early on is that if you sell any investment you have owned for less than one year, your gains are taxed at the same rates you pay on income taxes! These-sky high income rates can be pretty painful, especially with the risk that investing presents. On the other hand, if you are to hold your investments for more than one year, you pay long-term capital gains tax at the time you sell your investment. This current tax rate is closer to 20%, which is MUCH lower than the income tax rate which for us is 50%! This little tip can save you up to 30% on taxes just by holding investments for longer than one year at a time.

If you are like me, all that matters is how much money you keep, not what you make. The number that matters to me is the net amount I am actually able to keep, reinvest, or give away. Looking for ways to increase your tax efficiency can be a controversial topic, but I would like to point out that there is nothing immoral about strategically arranging finances to lawfully reduce tax burdens. As Federal Appeals Court Judge, Billings Hand stated in 1934:

“Anyone may arrange their affairs so that his taxes shall be as low as possible… nobody owes any public duty to pay more than the law demands.”

Other tax efficient strategies include asset location, tax loss harvesting, managing capital gains, and gifting appreciated securities. If this, or any of the topics above have helped you in your investing journey, please don’t hesitate to comment below! Additionally, if you would like more posts on any of the topics listed above, comment requests!

 

 

 

Sources: https://www.tonyrobbins.com/wealth-lifestyle/5-costly-investing-mistakes/ http://www.investopedia.com/articles/investing/022415/ten-worst-mistakes-beginner-investors-make.asp http://moneysmartlife.com/why-your-investments-care-if-you-use-a-broker-vs-fiduciary/ http://www.dywealth.com/resources/blog/maximizing-returns-investing-taxes-mind

 

Why I Got in the Investing Game

As Senior in college, I have taken a plethora of managerial accounting, finance, and economics courses; however, it wasn’t until a few years ago that my interest in investing began to grow. Despite my familiarity with balance sheets, income statements, and my basic knowledge of macroeconomics I’d been taught in school, I have always been terrified of the stock market and investing. I understood that what I didn’t know could hurt me, and didn’t know where to begin. This was a complicated subject where you can lose a lot of money really fast if you don’t know what you are doing. So what made me change my mind?

I’d heard the buzz around how important it is to “get in the investing game,” to better prepare for retirement and gain financial independence, but I needed to be convinced that it was necessary for me. So here are the top reasons why I got in the investing game, and so should you.  

KNOW YOUR FINANCIAL GOALS

Clearly defining both my short and long-term financial goals was a big step in the right direction. I knew I wanted to be financially independent, but what was that dollar figure? Once both short-term and long-term financial figures were set, I needed an action plan to raise the money, (as a graduating student with a good amount of student loans). I needed a way to speed up my financial-accumulation, and the top investors in the world were telling me I didn’t need to be intimidated by the best process to get me there–investing.

SET YOURSELF UP FOR SUCCESS-GAIN THE POWER OF COMPOUNDING

“Compounding is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” – Albert Einstein

Compound interest occurs when the interest that accrues to an amount of money in turn accrues interest itself. If you are a college student, I’m sure you have seen the demonstration of the power of compounding, but there’s an obvious reason why it is so commonly discussed–because it really is like a super power! One thing that people often forget however, is that you need time on your side for compounding to work. Investing is not a short-term financial fix, because what a difference even a decade makes to compounding.

As Tony Robbins points out in his book, Unshakable, another very important note to remember is that compound interest can also work against you, with loans and credit card companies. This is the reason why only making “minimum payments” on your car can keeping you paying off your car forever!

WHEN YOU START INVESTING OUTWEIGHS HOW MUCH YOU INVEST

If you understand compound interest, you understand that time is your best friend. The graphic below, represents the amount of money PER MONTH, that you would need to save at a modest 6% rate of return, to retire with $1 million in your bank account by age 65.

(Graph created by Business insider-Andy Kiersz)

EXECUTION IS POWER

One of the biggest principles of investing I struggled with, was making my first move. There were many hesitations, but the primary hesitation was the fact that I am living within an extremely tight budget. It wasn’t until I heard Tony’ Robbins tell about a fascinating story as part of a study called, Save More Tomorrow, that I committed to taking action.

In the study, a group of individuals in similar financial situations as I, automated a portion of their salary directly from their paycheck into retirement accounts. Every time these employees received a raise, an additional 3% was taken from each check and added to their retirement accounts. Tony goes on to say that after five years and three pay raises, these formerly broke employees were somehow managing to set aside 14% of their incomes!

I tried this for a three months, automating 10% of my income into investment accounts, and I was miraculously still able to live within my monthly budget! I had adapted to my new financial situation, so I can attest that this exercise helps. If this article has been helpful to you in any way, please comment below and follow my investing journey!

 

 

Sources: http://www.businessinsider.com/amazing-power-of-compound-interest-2014-7 https://www.tonyrobbins.com/wealth-lifestyle/get-in-the-game/

Warren Bets on Indexing

Investing gurus Warren Buffett, and David Swensen have both been quoted to say, “index funds are the best way for investors to maximize their chances of investment success.” So, what is an index fund? Index funds are very simple. Rather than spending the time researching and comparing individual stocks, index funds work by purchasing and holding all the stocks in a broad market index.

A few examples of index funds include: Dow Jones, Nasdaq, and S&P 500. Index funds are also great because, as quoted by John Bogle, the founder of Vangaurd, “index funds allow you to invest at a minimal cost in a portfolio diversified to the nth degree.” Essentially this is the difference between using investors that can charge upwards of 2% to manage your funds, which compounded over the course of 60 years, this compounded 2% in fees can absorb 70% of your returns!

Indexing is a great option for the American investor so that they are not stuck putting up 100% of the capitol and left with 100% of the risk only to receive a small percentage of the reward. These lower cost index funds are a great opportunity for college investors like myself who have little money to invest, to purchase and hold for the duration of my lifetime to ensure long-term stock market rewards.

All the data provided above was collected from the New York time’s bestseller, Unshakable by Tony Robbins. I read this book because I am the type of person that before I decide to put all my discretionary income into an investment, I want to do the research first. As a first-timer considering investing, companies working with mutual funds and 401K plans initially seemed like the safer bet. Until I read the staggering statistics of just how much money is being taken from my mutual fund investments to cover fees.

For my very first experiment testing out investing, I used an app called Acorns that automated my investments every time I made a purchase. After reading about the high fees I decided to look for myself and I discovered that I was being charged a 2% fee for using their “round-up” program, which although doesn’t sound like much—compounded this is a huge percentage of my investments.

It was at this moment that I really began considering index funds. Typing “indexing” into google search, I came across a video interview by investment expert Warren Buffet and Bill Gates. Buffett’s advice on investing for the general public was to invest in low-cost index funds such as the S&P 500, and when Mr. Buffett speaks investing advice, it is a good idea to listen. One probable reason that Indexing often outperforms hedge funds, is because hedge fund managers try to outperform the market (index funds), and usually mess up.

To emphasize his point, Buffett placed a bet with Protégé Partners’ Ted Seides, that an S&P 500 index fund would outperform a variety of selected hedge funds over the course of 10 years, beginning 2008. As this bet comes to a close, Buffet states that there is absolutely “no doubt” that the index fund will be victorious. These hedge funds returned a 2.2% compound annual return, versus 7.1% for the index. Warren Buffett himself states that he was only able to outperform the market “ten or so times,” so there is slim chance another manager would be able to do so.

So thanks for reading all the way through! If you would like to read more about index funds in the future, please comment opinions below!

References: http://www.azcentral.com/story/money/personalfinance/columnist/2017/03/08/buffetts-best-investment-tip-everyone-index-funds/98525306/Overcoming my

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