The Randall Sensei

Investing Basics

Unlocking the Door to Financial Growth: A Guide to Investing Basics

Investing can seem like a daunting venture for many, but understanding its fundamental principles is the first step toward financial empowerment. Whether you’re planning for retirement, saving for a big purchase, or simply aiming to grow your wealth, mastering the basics of investing is crucial. In this article, we’ll delve into key concepts including Time Value of Money (TVM), Compounded Interest (CI), types of stocks, and the importance of diversification.

1. Time Value of Money (TVM)

The Time Value of Money principle is foundational in finance, highlighting the notion that a dollar today is worth more than a dollar in the future. This concept revolves around the idea that money can earn interest over time, thus its value increases. Understanding TVM aids investors in making informed decisions regarding the allocation of their resources. Techniques like discounting future cash flows to their present value or calculating future worth of investments are integral applications of TVM.

2. Compounded Interest (CI)

Compounded Interest is the magic ingredient that turbocharges your investments over time. It’s the process where your initial investment earns interest, and then that interest earns interest, creating a snowball effect. Compound interest is a powerful force for wealth accumulation, particularly over long periods. It emphasizes the importance of starting to invest early and regularly contributing to your investments to take full advantage of the compounding effect.

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

— Albert Einstein

3. Common Stock, Preferred Stock, and Dividend Stock

Stocks represent ownership in a company and are a popular investment option. There are several types of stocks:

• Common Stock: These are the most common type of stock and typically come with voting rights at shareholder meetings. Common stockholders may receive dividends, but these dividends are not fixed and can vary depending on the company’s performance.
• Preferred Stock: Preferred stockholders have priority over common stockholders when it comes to dividends and assets in the event of liquidation. They often receive fixed dividends, providing a more predictable income stream compared to common stock.
• Dividend Stock: Some companies distribute a portion of their earnings to shareholders in the form of dividends. Dividend stocks can provide a steady income stream, making them attractive to income-focused investors. However, not all companies pay dividends, and dividend payments are not guaranteed.

Understanding the differences between these types of stocks can help investors tailor their portfolios to their financial goals and risk tolerance.

4. Diversification

“Diversification is the only free lunch in investing,” said Nobel laureate Harry Markowitz, and for good reason. Diversification involves spreading your investments across different asset classes, industries, and geographical regions to reduce risk. By not putting all your eggs in one basket, you can mitigate the impact of any single investment performing poorly. Diversification can be achieved through various means, including investing in mutual funds, exchange-traded funds (ETFs), or building a well-balanced portfolio of individual stocks and bonds.

In conclusion, investing is not just about picking stocks or chasing the latest trends; it’s about understanding the fundamental principles that drive the financial markets. By grasping concepts like Time Value of Money, Compound Interest, different types of stocks, and the importance of diversification, investors can navigate the complex world of investing with confidence and set themselves on the path toward financial success. Remember, while investing offers opportunities for growth, it’s essential to conduct thorough research, seek professional advice if needed, and stay disciplined in your investment strategy.

Extras

Intergenerational wealth is created when one’s investments provide not only for themselves, but for their children, grandchildren, and beyond.

The bullet points below show what would happen if a family were able to compound $10,000 at 7.0% annually (around the historical average of the U.S. stock market after inflation) over increasingly long periods of time:

• $19,672 after 10 years
• $54,274 after 25 years
• $294,570 after 50 years
• $8.68 million after 100 years
• $7.53 billion after 200 years​

Note: This is without saving any additional money after the first $10,000.

Unfortunately, the skills that it takes to build and maintain a growing investment portfolio are typically not transferred with an inheritance.

Time Magazine that 70% of rich families lose their wealth by the 2nd generation, and 90% by the third generation.

Building lasting intergenerational wealth requires an investing plan that is both effective and relatively easy to implement.

And that’s what makes buy and hold forever investing in high quality dividend growth stocks so appealing for creating intergenerational wealth.

This style of investing:

1. Creates truly passive income
2. Can generate rising passive income over the long run
3. Is accessible and easy to implement and manage

Of course, which stocks you invest in to create your rising passive income portfolio is critically important.

Source: Sure Dividend Newsletter – suredividend.com

Investing in Japan through Rakuten Securities

Investment Strategies

Investment strategies vary in risk and return potential, catering to different financial goals and risk tolerances. Financial planners, including Certified Financial Planners (CFPs), often recommend adjusting these strategies based on an investor’s age, financial goals, and time horizon. Here’s an overview of different investment strategies and examples for each, along with recommended ages:

Safe (Conservative) Investment Strategy

Characteristics:

• Focuses on capital preservation and low risk.
• Generates modest returns.
• Suitable for short-term goals and investors with low risk tolerance.

Examples:

• High-Quality Bonds: Government bonds, municipal bonds, and investment-grade corporate bonds.
• Certificates of Deposit (CDs): Fixed interest rate products offered by banks with low risk.
• Money Market Funds: Low-risk mutual funds that invest in short-term, high-quality investments issued by government and corporate entities.

Recommended Ages:

• Retirees and Near-Retirees (60+ years): This group typically focuses on preserving their nest egg and ensuring stable income.
• Risk-Averse Individuals: Regardless of age, those who prefer to minimize risk may opt for a conservative strategy.

Moderate (Balanced) Investment Strategy

Characteristics:

• Balances growth and income.
• Moderate risk and returns.
• Suitable for medium-term goals and investors with a balanced risk tolerance.

Examples:

• Balanced Mutual Funds: Mix of stocks and bonds to achieve a moderate risk profile.
• Dividend-Paying Stocks: Companies that pay regular dividends, offering both income and potential growth.
• Blend of Bonds and Equities: Typically a 50-60% allocation to stocks and 40-50% to bonds.

Recommended Ages:

• Middle-Aged Investors (40-60 years): Those planning for retirement within the next 10-20 years often balance growth and income.
• Moderate Risk Tolerance Investors: Individuals seeking both growth and some level of safety.

Aggressive Investment Strategy

Characteristics:

• Focuses on high growth potential.
• High risk with the potential for high returns.
• Suitable for long-term goals and investors with high risk tolerance.

Examples:

• Growth Stocks: Stocks of companies expected to grow at an above-average rate compared to other companies.
• Small-Cap and Emerging Markets Funds: Investments in smaller companies and emerging markets with high growth potential but higher risk.
• Sector Funds: Funds that invest in specific sectors like technology or biotechnology, which can be more volatile.

Recommended Ages:

• Younger Investors (20-40 years): Those with a longer time horizon can afford to take on more risk as they have time to recover from potential losses.
• High Risk Tolerance Investors: Individuals comfortable with market volatility and aiming for higher long-term returns.

Age-Based Recommendations by CFPs

CFPs often recommend a glide path approach, adjusting the investment strategy as one ages:

1. 20s to Early 30s (Aggressive):

• Primarily stocks (80-90%), with a small percentage in bonds or cash equivalents.
• Focus on growth to capitalize on the long time horizon.

1. Mid 30s to Early 50s (Moderate):

• Balanced mix of stocks (60-70%) and bonds (30-40%).
• Shift towards more income-generating investments as major financial goals (e.g., buying a home, children’s education) approach.

1. Mid 50s to Early 60s (Moderate to Conservative):

• Increase bond allocation (40-60%) while reducing stocks (40-60%).
• Protect accumulated wealth while still seeking moderate growth.

1. 60s and Beyond (Conservative):

• Higher allocation to bonds and cash equivalents (60-80%), with a smaller percentage in stocks (20-40%).
• Focus on income generation and capital preservation to support retirement needs.

These strategies and age recommendations are general guidelines. Individual circumstances, risk tolerance, and financial goals should drive the final investment decisions.