In this episode we will cover:

  • What to do before you start investing your money
  • Key attributes of a great investor
  • Resources on investing
  • Types of investments


Show Notes/Resources:

  1. Enron
  2. Economic bubbles
  3. Other – books, websites, and videos
  4. Return on Stocks vs gold vs silver comparison
  5. Independent resources: i.e – John Bogle, Burton Malkiel, Charles Ellis, William Bernstein, Larry Swedrow, Daniel Solin, Rick Ferri, David Swensen, Frank Armstrong III, Warren Buffett
    • Most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.  – Warren Buffett\
  • Beginner Books: 

        • Financial Happiness and What Color is the Sky by Mike Finley
        • Let’s Get Real About Money by Eric Tyson
          • Eric Tyson, author of Let’s Get Real About Money, provides the facts when he says: “Those in the insurance business, insurance companies and agents, who sell their products and earn commissions, have a bias in favor of cash value life insurance. The reasons are pretty simple. Cash value life insurance costs a lot more and provides far, far greater profits for insurance companies and commissions to the agents who sell it.”
        • The Smartest Investment Book You’ll Ever Read by Daniel Solin
          • Daniel Solin, author of The Smartest Investment Book You’ll Ever Read, tells us this: “The single greatest threat to your financial well being is the hyperactive broker or advisor. The second greatest threat to your financial well-being is the false belief that you can trade on your own, online or otherwise, and attempt to beat the markets by engaging in stock picking or market timing. Finally, the third greatest threat to your financial well being is paying attention to much of the financial media, which is often engaged in nothing more than “financial pornography.”
  • Intermediate Books: 

  • Investment Vocabulary

Stocks Owning a piece of a company. Receive quarterly dividends.
Bonds Loaning money typically to government or corporation and in return receive interests payments. Bond types are corporate, government, or municipalities.
Real Estate Investment Trusts (REITs) Owning piece of physical property. Company that owns income producing real estate.
Stock Market Also knows as equity market or share market. Is combination of buyers and sellers which represent ownership of shares in businesses. These could be publicly or privately held.
Mutual Funds Mix of securities which may include stocks and/or bonds
Managed Mutual Funds Person who professionally manages a pool of money investors invest in a mix of securities to determine what investments to buy and sell. (aka actively managed.) They try to beat market returns.
Indexed Mutual Fund Tracks a market index. Think S&P 500. Try to match the return of the market benchmark. Mainly done by computer.
Exchange Traded Funds (ETFs) Similar to mutual fund that pools a mix of securities may include stocks and/or bonds. Can be traded throughout the day where mutual funds only trade once per day.
Asset Allocation How much (%) you have and want in stocks, bonds and cash. Balancing risk and reward. Determines over 90% of return.
Asset Classes Grouping of similar type of investments. Examples Include stocks, bonds, cash, and real estate.
Asset Class Styles Breaking down asset classes into subgroups like you do for fruit or veggies for example. Stocks (Equity) assets include: Growth vs Value and Blend (mix of growth and value). Includes size – market capitalization (small, mid, and large) Includes location (domestic – US, foreign – International)
Recency Bias Simply means we put to much emphasis on what just happened.
Reversion to the Mean (RTM) Looking at historical return of a particular asset it comes back to the average return over time. What goes up must come down and vice versa.
Modern Portfolio Theory Risk vs reward. When pooling different assets classes together the risk of your portfolio goes down versus investing in only one asset class.
Efficient Market Hypothesis The prices in the market reflect all available information at that time.
Loss Aversion When we lose it hurts more than when we win.
Negative Correlation When two variables (assets) move in opposite directions. Doesn’t mean it happens 100% of the tend.
Rule of 72 Aka – rule of compounding. Take 72 divided by rate of return equals number of years your initial investment will double (2x) in value.
Rebalancing Sell winners and buy losers. Get back to your original asset allocation
Expense Ratio Costs to operate the fund. Can range from 0.0% to over 1%.
Load Mutual Funds May be charged an extra fee (sales charge / commission) to buy into – Class A (front-end), to hold to – Class C (ongoing), or to sell – Class B (back-end) the investment product.
No Load Mutual Funds Not charged the fee (sales charge / commission) to purchase or hold onto or sell the fund.
Real Return Annual percent return on investment – inflation = real return
Roth Money goes into a tax-sheltered account after (post-tax) your income taxes have already been paid. Grows tax free.
Traditional Money goes into a tax-sheltered account before (pre-tax) your income taxes have already been paid. Grows tax free. Will be taxed when money is withdrawn.
Annuities Combination of insurance and investment product. Tax sheltered so grows tax free.
Life Insurance Whole life (part insurance and part investment). Whole life is permanent. Term life (all insurance set period of time).
Fee-Only Advisor/Planner The only “helper” you want to consider.
Alpha You seek out “smart” people in the financial industry to beat the market, most fail, which is why we should avoid it, DO NOT try to pick the winners.