I want to invest. What should I know? Pt 2
Remember Shannon? She wants to invest, but has questions about the process and what she should consider. This is the conclusion of two coaching sessions.
The right questions helps us learn the right information.
Quality information assists in making quality decisions.
I have a follow up question. Is it okay if the investment stays put for a while?
Absolutely! When do you anticipate needing the invested funds?
To me, this can be a long-term investment; perhaps 15 – 20 years. I have a high yield savings account, with approximately 8 months of expenses saved. And I started contributing the minimum 3% to my 401(k) to receive the company match.
Helpful information and a reasonable time horizon. A long-term investment allows the investor to weather market volatility. In theory, the longer the investment is held, a single day or short-term loss could be recovered and surpassed. Again, no guaranty, but time works to the investor’s advantage.
Still sounds risky, but I feel better if I don’t need it soon. I can hold it and hope for the best.
Is this a lump sum investment or do you intend to make regular contributions?
Had not considered the options. What should I know?
The power of compound interest – earning interest on the interest! Compound interest on the initial investment produces moderate growth. Compound interest on the initial and additional investments produces exponential and accelerated growth.
Dollar cost averaging is a strategy used against the fluctuating share price while you are holding that investment. Regularly investing the same amount may reduce the long-term average cost of the investment. You invest $10 in MegaApples at the current share price of one dollar ($1). In 2 months, if the share price declines to $0.50, you can purchase more shares with the ten dollars. In another 2 months, if the price increases to $1.25 per share, you have less purchasing power. However, over the course of time, you may own more MegaApples shares than a one-time investment at the same price per share.
If I understand correctly, compound interest means I’m earning more money faster. Plus, if I acquire more shares by regularly contributing, I can potentially reduce the average amount I pay per share.
You got it! Do you know MegaApple’s expected or historical return?
9% year over year
Do you understand the difference between a single security purchase and other investment vehicles like a mutual fund, index fund or ETF?
A single security purchase is what we have been talking about with MegaApples. Never heard of the other options. Please explain.
Exactly right on the single stock purchase. An investor can purchase available securities from a specific issuer (i.e. 1 stock, 10 stocks or 100 stocks). The value of the investment solely relies on the value of that specific company’s stock price. The rise and fall of the stock price will directly impact the value of the investment.
Mutual funds receive contributions from investors to purchase a mix of shares. Mutual funds allow an investor to minimize their risk relative to their investment and reduce exposure to changes in the market. Mutual fund managers offer a high touch and ongoing selection of the securities to provide investors the highest return. Managers are working to outperform the market.
ETF (exchange traded fund) and index funds track the progress of a specific market index such as the Nasdaq or S&P 500. Similar to mutual funds, ETFs and index funds are a group of securities that can be bought and sold. But different because they are designed to be a lower touch, more passive investment with a lower barrier to entry. These options still allow an investor to invest in MegaApples, if they are part of the exchange or fund, without experiencing all the shifts specific to one company.
I will research other investment options for MegaApples and talk to a financial advisor. Especially since I’m not enthusiastic about this opportunity. The timeline is right, but I want to know all my options.
Good idea. Again, be an informed consumer. Know your options to make a quality decision.
Thanks, Ms. Gala. I have a lot of information to consider, but I understand it a lot more than I did before our discussions. I will call you if I have any other questions.
If investing is 100% uncomfortable, please talk to us at StudioM Financial. Information is available and important to providing peace of mind. Give some thought to our 50% uncomfortable, 70% incremental, 100% vital principle. Connect with us on social media, call or text, or schedule a 30 minute consultation. Until we meet…keep working on the change.