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How To Get Started Investing -- The 3 Pillars

How To Get Started Investing -- The 3 Pillars
everyone bill Lessman here for money evolution in today's video I'm gonna be talking about how to get

started

investing

so whether you're brand new to

investing

you're just starting to put some money away for the very first time or even if you're somebody that's already been

investing

for a number of years we're gonna start off with something very basic we're gonna talk about some of the basic principles behind

investing

talking about stocks versus bonds or equity
how to get started investing    the 3 pillars
versus debt and some of the considerations that you should be thinking about as you're starting to put together your portfolio so even again if you're a more experienced investor I think you're still gonna get some very good value out of this video and the videos that we're gonna do later on in this series that we're gonna be working on here so let's dive right in so the first thing I want to talk about here as it pertains to starting to invest are what I call the three
basic

pillars

of

investing

pillar number one is a business now everybody is going to necessarily participate in a business but this is something that you're actively doing could be a small business could be a big business it could be a business that's actually more of a side hustle type of a thing but for many of you this could be one of those key fundamentals for you becoming financially independent another type of

investing

is real estate

investing

now if you've watched my channel
here you probably know that I'm a pretty big fan of

investing

in real estate as one of those avenues towards financial independence but in today's video what I want to talk about really is that third leg probably the most common area of

investing

that most people are familiar with and that's what we call paper asset

investing

basically stocks and bonds so we're gonna take a dive into this and hopefully give you some education that you can use as you're starting to build your
portfolio and even if you are a more experienced investor I think you're still gonna find some very good value here with today's video because we're gonna get into some of the historical returns of some of these different asset classes and as you start to put together your portfolio understanding maybe why you're doing certain things with your portfolio and especially for those of you that might be getting closer to retirement I think understanding that risk is going to be
something very valuable so let's let's dive in on the whiteboard here and let's get

started

talking about the first basic premise and that is the difference between stocks and bonds okay so when it comes to paper asset

investing

there's really two broad categories of investments that we could be looking at the first type of investment would be what we call equity investment and the second type is what is known as debt

investing

and now you might be thinking hey what does that
mean those may be terms that you're not 100% familiar with but let me break it down to something a little bit more simple when we talk about equity

investing

we're really talking about ownership usually in stocks and by owning shares of a stock you're actually participating in the ownership of that company and the profitability or lack of profitability in that particular company when we talk about debt

investing

we're really 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 referred to as fixed income and to kind of illustrate this a little bit more closely let me give you kind of a little bit of an example here let me clear my board here and let's use an example of you buying a business let's just say you're driving home from work one day and you're getting a little tired of the rat race and you passed by this ice cream shop that's got a for sale sign on it so you call the
owner you ask them all the details of the ice-cream shop how much are they asking for it the profitability of it and things like that and so after learning all of that you decide that you're going to put an offer in on this ice-cream shop but let's just say that the owner is asking $100,000 for that ice-cream shop now there's a couple of different things okay let's say you know if you have $100,000 you could just go pay cash for the business that's certainly one way of
financing that but there's two other ways of financing that as well so one way would be to go to a bank or it could be a friend or it could be almost anybody could be a venture capitalist but you could go to somebody and actually borrow money and so when you borrow money you might say hey I'll put down 20% just as an example so I'll put down 20,000 dollars of my own money and I'm gonna borrow of $80,000 from somebody or some entity and then I'm gonna agree to pay that $80,000
back over a set period of time I'm gonna agree probably to an interest rate so I might say hey I'll agree pay you six percent interest and I'll make regular monthly payments over the course of five years or ten years or whatever it is that you negotiate and eventually that eighty thousand dollars is going to be paid off to zero and hopefully your business that you just bought makes enough money for you to pay that loan off and be able to make those regular payments that's again
what we call fixed income because this is something that is a fixed rate of interest that you're paying back and that you're paying to that financial entity so if you're 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 take out that loan but you could also be the person that's lending the money out to the company or could be lending money out to the US government or to a municipality or you know to anybody else
how to get started investing    the 3 pillars
and that would still be considered that that fixed income type of an example another way to finance a business would be through equity okay and an equity would be something and if you ever watched Shark Tank is a may be a good example there you know the Sharks oftentimes they're actually getting equity ownership and those businesses so in exchange for you know lending or giving that company money they're actually instead of agreeing to a fixed payment of return they're actually going
to get ownership in that business so you might say hey I'll lend you let's say the $80,000 and in exchange maybe I'll take twenty five percent of that business and so now that person is going to participate in the ownership of that company now a couple basic things here about the equity versus the fixed income number one the fixed income if that business were to fail if there's any equity left in the business the fixed income people are going to get their money back first and
only after all of that debt has been paid off would anybody get their money back for the equity so in simple terms you know the equity position is going to be a little bit riskier than the fixed income position because the equity people are only going to 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 on stocks and those dividend payments are probably not going to be made unless
they're able to make all of these fixed income payments as well you know so you're not likely going to get your money back if there's not enough profitability to be able to pay those fixed income investors so hopefully that makes sense hopefully gives you a little bit of an idea of just the general idea between fixed income and equity

investing

okay so now let's talk about how this pertains to you

investing

your money let's clear our whiteboard 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 doing is balancing out the amount of our money that we have invested in the equity side of those paper assets versus the fixed income side of those paper assets so historically if we look at the returns for stocks those are going to produce a you know generally speaking a higher upside potential but it's also going to be we'll put potential down
here but it's also going to be higher risk and so if you think of it like this when we talk about that fixed income investment you know if you've agreed to invest your money in a company and lend them money at 5% interest that company is probably not going to say hey you know Bill over here has been really good to us he lent us the money we're doing very well we agreed to pay him 5% interest but you know we're actually gonna give him 6% or 7% no company is going to probably do
that so you're locked into that again that's hence the name the fixed income on the stock market side though you know if that company is doing well and that company is making profits then that stock price is probably going to go up because people are going to view that company as hey this company is making money there they're adding new customers there they're getting new business and the profitability of that company is going up so you're participating in those those returns
with literally no upside or no yellow upside limit I guess is what I wanted to say there on the potential of what you could make on that and again the fixed income is going to be more limited so what do we want to think about here so as you're going through your invest life generally speaking if you're a younger investor or you're willing to take on a little bit more risk you might want to have you know more of an emphasis on the stock or the equity side of the equation there and if
you're getting closer to retirement or you're a little bit more risk-averse then you might want to have a little bit more money over here in the fixed income side of things so let's let's take a look at a couple of charts I'm going to try to get these up on the on the screen here ok so here we're 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 that's taken
from the JPMorgan guide to the markets it's a great resource it's totally free to get access to that if you actually just go to internet search browser and type in JPMorgan guide to the markets you should be able to find a link there within the first couple of returns and get into this and so this is one of those charts this is page 64 of what is a very large PDF but I like this because it illustrates some of those risk and return characteristics and how the longer time period that you
have for

investing

it tends to kind of minimize some of those those risks so when we look at a one-year basis we see that stocks as an example have averaged 11 percent compounded rate of return over this period of time going all the way back to 1950 the biggest year over that time period was a 47 percent return for the stock market so hey I'd be a great return I'd certainly be very happy with the 47 percent return but also over a one-year time period there was a 39 percent loss in there
how to get started investing    the 3 pillars
as well so again you know we don't have a crystal ball on the market to know whether these next 12 months are going to be one of those best years or one of the worst years so if we're going to be

investing

in the stock market we need to be prepared to take a loss of 39 percent and there can also be potentially bigger losses in there too because this year over calendar years okay so we

started

looking at you know kind of maximum drawdown if we think about like the 2000 to 2002 downturn
that happened over a three-year time period there was successive losses in three years 2000 2001 and 2002 I think the los was actually up around 50% so we need to be prepared with that as we're looking at

investing

bonds historically have averaged about 5.8 percent so you know a little bit over half of the return of the stock market but you can see you know much lower volatility historically the worst one-year time period for bonds was minus 8% so if you have a shorter time horizon
that's where you might want to consider having bonds and then they also look at a portfolio that's a 50/50 split between stocks and bonds we start looking out over five-year time periods now this is where I think it starts getting really interesting so the the best five-year time period for the stock market was 28 percent the worst five-year time period for stocks was minus 3 percent so that's you know a lot less risk you know if we're looking at over 5 years we

started

looking
at 10 years the worst 10 year time period for stocks was minus 1% and if we look at 20% the worst 10 year time period for stocks was 6 percent that's actually an annual basis so that's not just total return that's actually 6 percent per year and the best 20-year time period for stocks was 17 percent compounded per year we would look at bonds bonds actually have even though they're safer if we're looking at longer time periods they actually have a lower historical average in
terms of the the worst time period ever on record for for stocks now when we look at this over a longer period we can see this in a little bit different way and of course there's different types of stocks we're not going to get into that all together in this video but we look at this historically this is a Morningstar report that goes all the way back to 1926 so a little bit longer chart here but small cap stocks have averaged about eleven point eight percent over this period of time
large stocks at ten percent and then they also break down a couple different types of bonds government bonds five and a half percent and Treasury bills at three point three percent so it gives you a little bit of perspective there on these different types of returns and how we might want to think about putting together our portfolio okay so now let's go back to our whiteboard here and let's wrap things up and let's talk about how this new information that we've just learned today
how that applies to our individual portfolios again those two main asset classes are equity

investing

and fixed income or debt

investing

and there's a number of different ways that you can go about doing this so what I want is I want you to kind of keep things simple here for today if it's starting to invest versus not starting to invest I don't want you to get too hung up in the weeds and really get buried in the research if that means that you're not going to go forward with
putting together an investment portfolio or investment plan for yourself so there's a number of different ways you can do this so one thing that you might be familiar with and it's not my favorite type of

investing

but it is something that is readily available to you probably if you have a 401k or 403b plan through work but target-date funds can be a way for you to say hey I'm in a position right now I want to start

investing

I'm not really sure exactly how to go about doing a
target date fund is probably not going to steer you in to wrong of a place you're going to get some pretty good value out of that and the idea with a target date fund is it's going to usually be age based and and what that means is that your asset allocation earlier on if you're let's say you're in your 20s is going to have a much higher exposure to that equities and a much lower exposure to the fixed income part of the equation there so you're going to have more of that
risk because the idea is that if you're in your 20s you have a lot of time probably until you're going to need to start taking this money out ideally probably in retirement and as you go closer to retirement if you're somebody that's in your 50s that might be almost the opposite you might have maybe you know 40% to 60% invested in stocks and the rest of it would be in fixed income and the idea there is we want to reduce that amount of risk as you get closer to retirement so a
target they fund is one of those ways that you can do that there's a number of other ways that you can do it index fund

investing

and we're going to talk about that on some of the other videos here we're gonna take a deeper dive 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 just to say hey I've got to put some money in I want to be an equity fund investor so you might look at the S&P 500 and
again the sp500 is certainly going to have some risks with it it's going to be probably more aligned with that other chart we were looking at with that you know big up and the big down potential over a one-year basis but the sp500 it could be another one of those mutual funds could be another option and there are literally thousands of different mutual funds there's actually thousands of different indexes I've actually read here not too long ago there's actually more indexes than
there are stocks that are publicly traded on the stock exchanges so there's a lot to pick from here but you know obviously S&P is one of those big ones mutual funds again there's thousands of those and you could do some research you know read some publications you know try to find a manager that has some good performance one thing that I like and we're going to talk about as well and some of these other videos factor

investing

and there's a couple different ways to get into
that but basically it's looking at maybe what we think is a better way to index where we're taking an index and we're looking for characteristics that we believe have above-average attributes for long-term performance you know things like companies that have good return on assets or they have low debt they have good growth their earnings are going up in a in a positive direction and so you can do that through ETFs and again we're kind of drilling down from something that's
very basic like a target date fund into indexes maybe some mutual funds some factor

investing

and then the last thing and this is something that only for those of you that are just think I spelled that wrong individual stocks here trying to write and talk at the same time but individual stocks could be another way for you to get into the stock market but again that's something that's going to require the most amount of knowledge and expertise and it's going to also require the
biggest amount of work to so you really have to do your homework and you have to do your homework with all this stuff quite honestly but as you get into those individual stocks that's where it really kind of be has that where you have to really know what you're doing there on that so anyway I hope that was a pretty good overview on how to start

investing

the biggest thing I can tell you is 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 get

started

but you're trying to figure out your cash flow you can check out some of the links below this video we've got some great video series that kind of take a step further back and that is getting your whole financial house in order and understanding you know where some of the money is going so that you have the money to invest 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 please hit that subscribe button hit the like button also that's how we get that out there to everybody share the video and check out the links below we also have our new resource center that's going to have a lot of additional content that's not available here on the YouTube channel so it'll be a link to that very easy once you register for that you'll get access to all of the information in the Resource Center plus it'll also give you access
to our live events that we do on a regular basis as well so check that out and I will see you back here in one of our next videos have a great day thanks