How To Get Started Investing -- The 3 Pillars

everyone bills Lessman for the evolution of money in today's video. I'm going to talk about how to start

investing

, so if you're new to

investing

, just starting to save some money for the first time or even if you're someone who's already been investing for several years, we'll start with something very basic, We'll talk about some of the basic principles behind investing, we'll talk about stocks versus bonds or stocks versus debt and some of the considerations that you should think about when you start putting together your portfolio, so even if you're a more experienced investor, I think that you will still get a very good value from this video and the videos that we are going to show.

We'll do more later in this series that we're going to work on here, so let's dive right in. The first thing I want to talk about here when it comes to starting to invest is what I call the three basic

pillars

of investment pillar number one. is a business, now everyone will necessarily be involved in a business, but this is something that you are actively doing, it could be a small business, it could be a big business, it could be a business that is actually more of a side hustle, but for many Of you, this could be one of those key foundations to becoming financially independent.

Another type of investment is real estate investment. If you've seen my channel here, you probably know that I'm a big fan of investing in real estate. as one of those paths to financial independence, but in today's video what I really want to talk about is that third stage, probably the most common area of ​​investing that most people are familiar with and that's what We call investing in paper assets, basically stocks and bonds, so let's dive into this and hopefully give you some education that you can use as you start to build your portfolio and even if you're a more experienced investor, I think You will still find a very good value here.

Today's video because we're going to get into some of the historical returns of some of these different asset classes and as you start to put your portfolio together, you'll understand maybe why you're doing certain things with your portfolio and especially for those of you who could We will be getting closer to retirement. I think understanding risk is going to be a very valuable thing, so let's dig down to the whiteboard and start talking about the first basic premise, which is the difference between stocks and bonds. Well, when the time comes. Regarding investing in paper assets, there are actually two broad categories of investments that we could consider: the first type of investment would be what we call equity investment and the second type is what is known as debt investment and could now be thinking, what does that mean?

I mean they may be terms you're not 100% familiar with, but let me break them down into something a little simpler. When we talk about investing in stocks, we are actually talking about ownership, usually in stocks and owning shares of a stock. you are actually participating in the ownership of that company and the profitability or lack of profitability of that particular company. When we talk about debt investing, we're actually talking about a couple of things, it could be bonds, so you lend money to a particular company. or entity or it could also be called fixed income and to illustrate this a little bit more closely, let me give you a little example here, let me clarify my dashboard here and let's use an example of your purchase. a business, let's say you're driving home from work one day and you're getting a little tired of the rat race and you pass an ice cream shop that has a for sale sign, so you call the owner and ask him. all the details of the ice cream shop, how much they ask for it, the profitability of it and things like that, and after finding out all that you decide that you are going to make an offer for this ice cream shop, but let's just say that the owner is asking $100,000 for it ice cream shop, now there are a couple of different things, okay, let's say if you have $100,000 you can pay cash for the business, that's certainly one way to finance it, but there are two.

Other ways to finance that would also be to go to a bank or it could be a friend or it could be almost anyone it could be a venture capitalist but you could go to someone and borrow money and so when you borrow money you could say, "Hey, "I'll use 20% as an example, so I'll put up $20,000 of my own money and borrow $80,000 from someone or some entity and then agree to pay that." They will refund me $80,000 over a set period of time. I'll probably agree to an interest rate, so I could say, "Hey, I'll agree to pay you six percent interest and make regular monthly payments over the course of five or ten years or whatever I negotiate and eventually, That eighty thousand dollars will settle down to zero and hopefully your business that you just bought makes enough money to pay off that loan so you can make those regular payments, that's again what we call fixed income because it's something that's an interest rate. fixes that you are paying and that you are paying that financial institution, so if you are an investor you could be on the other side of this, so here we use the example of you going out to buy the business and getting that loan, but you could also be the person who lends the money to the company or could be lending money to the US government or a municipality or anyone else and that would still be considered that type of fixed income is an example, another form of. financing a business would be through equity, okay, and equity would be something, and if you ever watched Shark Tank, that might be a good example, you know the Sharks. a lot of times they actually get equity ownership and those businesses, so in exchange for you know, lending or giving money to that company, instead of accepting a fixed performance payment, they'll actually get ownership of that business, so that you could Say, hey, I'll lend you, let's say, $80,000 and in exchange I'll maybe get twenty-five percent of that business, so now that person is going to have a stake in the ownership of that company.

Now, a couple of basic things here about equity versus capital. fixed income number one fixed income if that business were to fail if there is any capital left in the business the fixed income people will get their money back first and only after all that debt has been paid will anyone get their money back we're back for variable income , so in simple terms, you know that the stock position is going to be a little bit riskier than the fixed income position because the stock people will only get their money after that fixed income is paid. Another thing too is let's say we're talking about dividends and dividends or something very common in stocks and those dividend payments probably aren't going to happen unless they can also make all of these fixed income payments, so they probably won't get We'll give you your money back. money if there isn't enough return to be able to pay those fixed income investors, so I hope that makes sense and gives you a little idea of ​​the general idea between fixed income investing and investing in stocks.

Okay, now let's talk about how this. it's about you investing your money, let's clean our slate again here and what we want to think about here is the level of risk that we're taking on with our portfolio and obviously one of the first things we want to talk about is balancing the amount of our money that we've invested in the equity side of those paper assets versus the fixed income side of those paper assets, so historically, if we look at equity returns, those are going to produce, broadly speaking, a greater upside potential. but we will also put potential here, but there will also be a higher risk, so if you think about it like that when we talk about that fixed income investment, you know if you have agreed to invest your money in a company and lend them money at 5% interest that company probably He's not going to say hey, you know, Bill has been very good to us, he lent us the money, we're doing very well, we agreed to pay him 5% interest, but you know, we'll actually give him 6% or 7%. , no company is likely to do that, so you're stuck with it again, hence the name fixed income on the stock market side, although you know if that company is doing it. well, and that company is making a profit, then the stock price will probably go up because people will see that company as, hey, this company is making money, they are adding new customers, there they are getting new business and the profitability of that company is going up, so you are participating in those returns with literally no profit or no yellow profit limit.

I guess that's what I meant about the potential of what you could earn on that and again fixed income is going to go up. be more limited, so what do we want to think about here? As you go through your investing life, generally speaking, if you're a younger investor or willing to take on a little more risk, you might want to have it. I know more emphasis on the stocks or shares side of the equation there and if you're getting closer to retirement or are a little more risk averse then you might want to have a little more money here on the income side fixed, so let's take a look at a couple of graphs.

I'm going to try to show them on the screen, here okay, here we are looking at the long-term historical returns and the amount. of risk associated with those returns for a couple of our major asset classes, so this is something taken from JPMorgan's markets guide. It's a great resource, it's totally free to access if you just go to your internet search browser and type in JPMorgan's guide to markets, you should be able to find a link there within the first few results and access this, so this It's one of those graphics. This is page 64 of what is a very large PDF, but I like it because it illustrates some of those risk and return characteristics and how the longer time period you have to invest tends to minimize some of those risks, so When we look at a one year basis we see that stocks, for example, have averaged an 11 percent compounded rate of return over this time period dating back to 1950, the biggest year during that period was a 47 percent return for the stock market, so well, that would be a great return that I would certainly be very happy with the 47 percent return, but also over a one year period there was a 39 percent loss, so again, you know not We have a crystal ball in the market to know if these next 12 months will be one. of those best years or one of the worst, so if we are going to invest in the stock market we must be prepared to take a 39 percent loss and there may also be potentially larger losses because this year is over. calendar years, okay, so we start to consider the type of maximum drawdown, if we think about the 2000 to 2002 recession that occurred over a three-year period, there were successive losses in three years 2000, 2001 and 2002, I think the loss was actually.

It's up about 50%, so we need to be prepared with that as we're looking at investment bonds which have historically averaged around 5.8 percent, so you know a little over half the performance of the bond market. values, but you can see that it knows much lower volatility. Historically the worst one year period for bonds was -8% so if you have a shorter time horizon that is where you might consider holding bonds and then also look at a portfolio that is split 50/50 between stocks and bonuses. Let's start looking at five year periods now, this is where I think it starts to get really interesting, so the best five year period for the stock market was 28 percent, the worst five year period for stocks was -3 percent, so I mean, there's a lot less risk, you know, if we look over 5 years, we start looking at 10 years, the worst 10 year period for stocks was minus 1% and if we look 20%, the worst 10-year period for the stock was 6 percent, which is actually on an annual basis, so it's not just a total return that's actually 6 percent annually and the best 10-year period 20 years for stocks was 17 percent compounded per year.

We would look at bonds that bonds actually have even though they are safer if we look at longer time periods, they actually have a lower historical average in terms of the worst period ever recorded for stocks. Now, when we look at this over a longer period, we can look at it a little differently. way and of course there are different types of stocks that we're not going to go into detail in this video, but we look at it historically. This is a Morningstar report going back to 1926, so here's a slightly longer chart, but small cap stocks have averaged about eleven point eight percent over this time period, large stocks ten percent and then they also break down a couple different types of bonds, government bonds at five and a half percent and Treasury bills atthree point three percent, so it gives a little bit of perspective on these different types of returns and how we might want to think about putting together our portfolio, so now let's go back to our whiteboard here and summarize things and talk about how this new information that have.

Today I just learned how this applies again to our individual portfolios. Those two main asset classes are equity investing and fixed income or debt investing, and there are several different ways to do it, so what I want is that Keep things simple for today if you're starting to invest. versus not starting investing I don't want you to get too caught up in the weeds and really get buried in research if that means you're not going to move forward with putting together an investment portfolio or an investment plan for yourself, so there are several different ways to do this, so there's one thing that you may be familiar with that is not my favorite type of investment, but it is something that is readily available to you, probably if you have a 401k or 403b plan at all. through work, but your goal is Target-date funds can be a way of saying: Hey, I'm in a position right now.

I want to start investing. I'm not really sure exactly how to go about achieving a target date fund. It's probably not going to steer you wrong of one place, you're going to get pretty good value out of that and the idea with a target date fund is that it's usually going to be based on age and what that means is that your asset allocation before, if you're let's say If you are 20 years old you will have much greater exposure to those stocks and much less exposure to the fixed income part of the equation, so you will have more risk because the idea is that if you are 20 years old, you probably have a lot of time until You need to start withdrawing this money, ideally probably during retirement, and as you get closer to retirement, if you're someone who's in your 50s, that could be close to 40%. 60% is invested in stocks and the rest in fixed income and the idea is that we want to reduce that amount of risk as you get closer to retirement, so a goal funding is one of those ways that you can do that, there is many other ways you can do that by investing in index funds and we're going to talk about that in some of the other videos here, we'll go into more depth than I've already talked about index funds again.

I think there's a lot of potential risks with that, but you know, one option is to just say, "Hey, I have to invest some money." I want to be a stock fund investor, so you might look at the S&P. 500 and again the sp500 is certainly going to have some risks, it will probably be more aligned with that other chart that we were looking at that knows the huge potential for ups and downs over the course of a year, but the sp500 could be another one of those mutual funds could be another option and there are literally thousands of different mutual funds.

In reality, there are thousands of different indexes. In fact, I read here not long ago. There are actually more indices than there are publicly traded stocks. stock exchanges, so there's a lot to choose from here, but obviously S&P is one of those big mutual funds, there are thousands of them and you could do some research, read some publications, try to find a manager that has some. good performance is something that I like and that we're going to talk about as well and some of these other videos factor the investment and there are a couple of different ways to approach it, but basically it's about seeing what we think is a better way to index . where we take an index and look for characteristics that we think have above average attributes for long-term performance, you know, things like companies that have a good return on assets or have little debt, have good growth, their earnings are going up in a positive direction and you can do that through ETFs and again we're drilling down from something that's very basic like an index target date fund, maybe some mutual funds, some factor investing and then the latest and This is something that just for those of you who think I misspelled individual stocks here trying to write and talk at the same time, but individual stocks could be another way to get into the stock market, but again, that's something that's happening. it's going to take the most knowledge and experience and it's also going to take the most work, so you really have to do your homework and you have to do your homework on all of these things, honestly, but as you get into those individual actions there is where you really have to really know what you're doing there, so anyway I hope that was a pretty good overview of how to get

started

investing.

The most important thing I can tell you is that you just start if you're in a position right now where maybe you don't have enough money to start investing and you want to start but you're trying to figure out your cash flow. You can check out some of the links below this video that we have I have a great series of videos that take it a step further and that is getting your entire financial house in order and understanding that you know where some of the money is going so that you have the money to investing and that's one of the critical components of getting to that point where you're going to be financially independent, so if you liked this video, hit the subscribe button, hit the like button.

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