THE FIRST STEP TO INVESTING (HINT: IT’S EASY!)
Originally published on POPSUGAR, from the Dumpster Dog Blog
Should you invest in Lululemon stock or Tesla stock? Facebook or Apple? Tech or health care? Have you studied your balance sheets? Forward-looking price-to-earnings ratios? Oil prices and housing starts?
J/K! None of that shit matters. (At least, not for most of us.)
With investing, the most important decision you make is not which stock you pick but whether you invest in stocks at all, or bonds, and cash, and other broad categories of investments (called “asset classes”). This big picture decision is called “asset allocation” and should be what gets the majority of your attention.
How does one determine asset allocation? By analyzing personal goals, which are the ovule of all investing decisions. They’re unsexy and boring so folks tend to rush through ’em, but skipping this basic is like agreeing to marry someone without first checking to see if s/he has a job, wants kids, is potty trained, etc. First things first!
When looking at any pool of money, you must always first ask: What is this money for? In other words, what is the goal? Then, think about your goal through these three lenses:
Knowledge of how the different asset classes (stocks, bonds, cash, etc.) have performed and behave over time.
Before we talk about No. 1 and No. 2, let’s talk about No. 3 for a minute — a quick review of stocks and bonds is in order!
Understanding the Different Asset Classes
A stock is a tiny sliver of ownership of a company. When a company grows, your teeny piece of the pie should (hypothetically) grow with it. A bond, on the other hand, is a contract. You are loaning your money to some entity (a company, the government), and they pay you a stated rate of interest for using your money.
Stocks are expected to make more money than bonds, but that reward comes with a parallel risk! You don’t get 7 percent to 10 percent annual returns in the stock market fo’ freesies! And stock market risk comes in the form of volatility.
Volatility is a total mindfuck. You’ve heard this word used before, but take a minute to marinate in what it means: money you worked your tush off to save could lose a ton of value at any moment and quickly. In 2008, the stock market was down 50 percent. If you had invested $100,000 in the stock market, a few months later you had $50,000.
Bonds, on the other hand, are predictable. You’re probably going to get a lower average rate of return, but there’s less volatility than with stocks. That’s not to say that bonds are risk-free; they aren’t. The only risk-free option is keeping your money in cash.*
Next, let’s explore two examples of saved money. Using our goals, we can determine how to invest. The first is via a down payment on a house. The second is via retirement. Don’t forget to consider time frame and risk!
Read More: https://www.herfirst100k.com/blog-posts/2019/2/25/the-often-overlooked-first-step-to-investing-hint-its-easy?rq=Money
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