Menu #3: Growing wealth through strategic investing

STATS STACK 🥞

• 10% is the S&P 500 average annualized return over the past 50 years (Source: Forbes).

• 18 months is the longest time it has taken the U.S. economy to recover from a recession in the post-World War II era (Source: CNBC).

• 37% of survey respondents (below) think their financial situations will improve in 2024, slightly up from last year at 34% (Source: Bankrate survey).

DEEP DISH 🍕
Roadmap to Growing Wealth: A Guide to Strategic Investing

Investing in the stock market is a cornerstone of wealth building in the United States. It's been a big deal in the U.S. for over 200 years – ever since the New York Stock Exchange kicked off. And guess what? Nowadays, it's super easy to get in on the action, thanks to online brokers adopting no-fee trading. But before you start, it's key to get your head around the different ways you can play the game. Investing is all about striking that sweet spot between risk and possible reward.

First, let’s chat about mutual funds. They're like a mixed bag of different company stocks, all bundled together and managed by pros whose job is to make the fund shine. The cool part? You get a variety of stocks in one go, and you don't have to sweat the details. The catch? Because someone's actively managing the fund, the fees are a bit steeper – think around 0.5% to 1%.

• Actionable Takeaway: Mutual funds are best for those who prefer a hands-off approach but still want diversity in their portfolio.

Next, we’ll discuss index funds. They are funds that mirror specific market indexes, like the S&P 500 or Dow Jones Industrial Average. These funds offer small pieces of most or all of the stocks in an index, pooled together. They use algorithms rather than human managers, resulting in lower fees (usually under 0.2%). Here's a fun fact: Most mutual funds don't beat the overall market. That's why a lot of folks look at index funds.

• Actionable Takeaway: Index funds might do better or worse than the index they're following, and there are some rules about how often you can buy or sell. They're a good choice if you're seeking market-average returns with lower risk and cost.

Then, there are Exchange Traded Funds, or ETFs for short. They're a bit like stocks but are actually a cocktail of different company stocks. They can focus on specific industries (tech, agriculture, healthcare, etc.) or follow an index too. The bonus? No minimum investment, and you can trade them whenever you like.

• Actionable Takeaway: They are particularly useful for targeting specific sectors or themes and for investors who prefer trading stocks with the added benefit of diversification.

Let’s move on from stocks to another form of investing called bonds. Think of bonds as a loan you give to a government or a company. When you buy a bond, you're saying, "Here's some cash, I trust you'll pay me back." In return, they're like, "Sure thing, and we'll throw in some extra as a thank you over time."

The extra they give you is the interest, which depends on how risky they are to lend to. If it's a super-steady government bond, the interest might be a bit lower. But if it's a corporate bond, they might offer you more interest, a bit like a thank you for being brave enough to lend to them.

Example: Imagine you buy a bond for $10,000. It's set to mature in 10 years and has a 5% coupon rate. This means every year, you'll get $500 (that's the 5% interest), just for letting them use your money. And when the 10 years are up, you'll get your original $10,000 back.

• Actionable Takeaway: Consider investing in bonds as a relatively safe and predictable way to earn interest on your money while also supporting government or corporate initiatives. This can be a strategy for earning passive income while diversifying your investment portfolio.

• Stocks vs bonds: Unlike stocks, bonds don't give you ownership rights. So you don't necessarily benefit from the company's growth, but you won't see as much volatility when the company isn't doing as well, either.

Now, the golden rule of investing: Keep feeding your portfolio and stick with it for the long haul. That’s where the magic of compound interest comes in – it's like a snowball rolling down a hill, getting bigger and bigger. Even Albert Einstein famously called compound interest the eighth wonder of the world. And history is on our side – the stock market has given back about 10% each year on average, despite some rough patches.

Starting early and sticking to it can pay off big time. Imagine turning a $100 monthly investment into thousands over the years. It’s all about playing the long game and not freaking out when the market dips. Big-name brokers like Vanguard, Fidelity, and Charles Schwab make jumping in pretty straightforward.

Last but not least, let's talk about spreading your eggs in different baskets, or asset allocation as the pros call it. It’s about balancing your investments between stocks, bonds, and cash to match what you're aiming for, how much risk you can stomach, and when you need the money. Getting this mix right is a big deal for making your money work hard over the long term. We’ll delve into this topic in a future issue because you’ve probably had enough fun reading today’s deep dive! 😅 

So there you have it – a quick tour of the stock market world. Remember, it's all about understanding your options, starting early, being consistent, and not putting all your eggs in one basket. Happy investing!

SWEET LINKS 🍰
Digital bites we think you’ll like

• Listen up, AI has a voice too — Financial expert and author Nicole Lapin and her AI sidekick combine the best elements of human nature and technology to help guests take actionable steps toward financial freedom.

• The state of the economy — These 78 charts, courtesy of our friends at Bay Area Times, will help you be more informed about where we’ve been, where we are, and looking ahead at our economic path.

• Pay me in “likes” and “subscribes” — Gen Z YouTubers will worry about investing later. For now, they’ll work at Target for free.

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