I want to invest. What should I know? Pt 1
For many people, investing is mysterious or intimidating. Simply, investing means you offer a person or organization resources expecting a larger return at a future date. The amount of the offered resources and return is determined by a few factors. First, how much can an individual afford to invest if no return is realized? Not every investment yields a return, or even a return equal to the initial investment. Are investors comfortable taking a loss? The other side requires determining how reliable the person or organization is to provide a return on the investment. Do they have a history of increasing the value of the investment? No result is guaranteed, but that history can help indicate future performance.
Let’s look at investing through the lens of a coaching session.
Shannon, 38, is a new investor and has $1,500. Shannon wants to invest some money in MegaApples Inc. She heard MegaApples has historically returned an average of 9% to their investors over the last 12 years. Shannon thinks that is reasonable but is uncertain about what to consider. She enlists the help of a financial coach to talk through the opportunity. Shannon understands that her coach, Ms. Gala, can’t recommend an investment but can help Shannon understand the investment process and MegaApples’ prospect. It is still Shannon’s choice.
Questions help us learn.
What we learn informs and helps us make quality decisions.
Ms. Gala asks general and specific investing questions to frame the conversation.
Shannon, how comfortable are you investing in MegaApples Company and why?
Low to moderate. I don’t know enough about MegaApples beyond what I heard from co-workers and what I’ve read in the newspaper. A lot of people are talking about it, I gather it is rather hot. I don’t pay attention to the market and investing sounds complicated. I would like someone to educate me on the basics and what information I should consider.
Let’s back up a little, what do you know about investing?
Not much other than I give money to a company and the company is supposed to give me money back.
Correct, with one small adjustment. Savings works much like you just described. An individual deposits money in a financial institution, and the financial institution provides that money, plus any accrued interest, back to the individual. The deposit is insured because it is covered by the FDIC. Investing is different. An individual ‘deposits’ a sum of money in exchange for a share, also known as a stock, representing an ownership share in the company. A return is not guaranteed, rather a return is projected. Similar to savings, the return is represented by a percentage, but at a much higher level than a standard savings account. Bonds are another type of investment. That investment involves an individual providing a loan to a company in exchange for future dividend payments along with the return of the original principal.
Makes sense. I think we are talking about investing in MegaApples stock.
That is correct. What resources do you have to invest?
$1,500.00
How much of the $1,500 do you want to invest and why?
Five hundred ($500) or less. The investment seems risky and I want to accomplish other financial goals with the remaining funds.
Shannon, are you comfortable investing if no return is realized?
Why would that happen?
MegaApples could become insolvent. The market could drop causing the price and value of MegaApples stock to drop, which means your investment loses value. Or a competitor could emerge in the market.
Like I said, risky. How can I avoid that result?
The only way to avoid risk is to avoid investing. However, quality research, a reasonable investment mix, and a longer time horizon, could insulate an investor from major market swings and preserve the investment. Remember, investing is a common method to grow net worth and generate wealth.
I think that is a lot for me to consider right now. Can we meet again next week and discuss more details of this investment?
Of course! I want you to make a well-informed decision.
If you find yourself having a similar thought process, I hope this week’s introduction gave you good information to consider. How much is available to invest, are there other financial goals to accomplish, and how much are you comfortable risking? I encourage you to come back next week for the continuation of our ‘coaching session.’
50% uncomfortable, 70% incremental, 100% vital. Happy to talk with you about the fundamentals of investment. Connect with us on social media, call or text, or schedule a 30 minute consultation. Until we meet…keep working on the change.