EP033 Investing Basics

Understanding the basics is foundational when learning a new skill or pursuing new undertakings. The first step before investing is to equip yourself with the basics of how investing works. It is crucial that you understand how investment returns are generated and how investors gauge and manage risks based on their investment objectives and time horizon.

 

“No matter what your time horizon or risk tolerance, you should never invest your money in something you do not understand.” – Tracey Bissett

 

Today, I’m sharing a micro-training on investment basics including the definition of some common investing and saving financial terms. I discuss what investment objectives are as well as the four main asset classes: 1) equities (i.e. stocks), 2) fixed income (i.e. bonds), 3) cash equivalents (i.e. money market instruments) and 4) alternative investments (i.e.: real estate, commodities and cryptocurrencies). I also talk about why it is crucial to know your risk tolerance and how to determine the best investment choice or decision for you.

 

“Everybody is going to have a unique perspective and something that you’re more comfortable with than someone else. This is why investing is a very personal decision.” – Tracey Bissett

 

This Week on Young Money:

  • What is investing and the primary goal of each investor
  • Definition of terms such as principal, capital, return, investor
  • What compound interest is and why it is so desirable
  • What diversification, risk tolerance and liquidity are
  • The difference between a guaranteed vs. non-guaranteed investment
  • What is an investor or investment risk profile
  • The concept of time horizon defined and how one investor may have multiple time horizons
  • The importance of understanding how various investment returns (interest, dividends and capital gains) will be taxed
  • The four main asset classes
  • How to assess your investment plan based on your time horizon and risk tolerance

 

Key Takeaways:

  • Never invest your money in something you do not understand.
  • It’s okay to say you are a beginner and you do not have a lot of investment knowledge, especially to the person you are going to be making investments with. It is their responsibility to help with your financial education so you can make great investment decisions.
  • Never be afraid to ask questions. No question should be considered stupid or bad.
  • Anybody who’s trying to sell you an investment should be prepared to commit the time to help you learn.
  • Generally, if somebody cannot explain the investment to you in simple terms, it’s probably not the right thing for you or they may not be the right investment advisor for you.
  • Invest with your brain and not with your emotions.
  • It is never too early or too late to start investing.

 

Resources Mentioned:

 

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