During this TMWYK session, Aarti taught us about investing and retirement planning.  It’s all about how you can make your money work for you! We covered a ton of information this session but I outlined the notes so you can just skip to the sections you’re interested in. Hopefully this overview will help you understand the basics and the value of investing early so you can get started on your path to retirement and financial freedom! Be sure to see the previous TMWYK financial sessions for more information. Please talk to your financial advisor for more in depth understanding and to help you make decisions based on the specifics of your situation.

Feedback:

What is investing?
Making your money work for you

Compounding = core concept to understand about investing
1.  Interest is calculated on original amount plus any additional interest
2.  Time is your advantage, the earlier you start investing, the better
3. Rule #1: don’t lose money! You lose compound interest advantage
4. Resources:
a. Khan Academy: https://www.khanacademy.org/economics-finance-domain/core-finance

Risk Tolerance = the most important factor of your personality to consider when investing
1. Personality tests available online for risk tolerance:
a. Financial engines
b. CNN Money
c. Mutual fund companies
– Vanguard: https://personal.vanguard.com/us/FundsInvQuestionnaire
– Wells Fargo: https://www.wellsfargo.com/investing/retirement/tools/risk-tolerance-quiz/
d. Other online:
– http://njaes.rutgers.edu:8080/money/riskquiz/
2. Diversification depends on what stage of life you are in:
a. Age (younger vs older)
b. Obligations (kids, debts, etc)

Financial advisor
a. Who should have an advisor:
– If you are not inclined/confident/knowledgable enough to do it yourself
– Don’t have the time to manage yourself
– Willing to pay someone to manage for you
b. When to begin finding a financial advisor:
– ASAP
c. How to find an advisor:
– Referrals from friends, colleagues is a great way to find an advisor
– Through your employer, some large employers work with financial advisors for their employees. May even be part of benefits package
d. What to look for in an advisor:
– Find an advisor who does not charge commission (gets paid per trade) because he may trade to get more money, even if it’s not in your best interest to make that trade
– As a general rule, roughly 1% of $500K is now a standard fee depending on how much you invest
e. Resources:
– Learn more about investing and advisors through your work, free dinners, banks/company courses
– Dave Ramsey: http://www.daveramsey.com/home/
– Suze Orman: http://www.suzeorman.com/
– Ramit Sethi: http://www.iwillteachyoutoberich.com/about/about-ramit/

Investments:
1. CD:
a. Fixed term
b. Lower rates
c. Penalty for withdrawing money early
2. Money Market:
a. Savings with your bank
b. Low rate (usually less than inflation so you’re “losing” money in the long run)
c. Only $100K per institution is FDIC insured so spread out your money
3. Treasury:
a. Supposed to be safe but not necessarily if treasury has increasing debt
b. Notes: longer term maturity, marketplace determines rate, safe
c. Bills:
d. Savings Bonds: when matures and get interest, if using the money for education then you are not taxed on the interest income, can get between 4-6% return
e. Resources: (can buy here also)
– http://www.treasurydirect.gov/
4. Municipal Bond:
a. Available from state, city, or district
b. Federal tax free and if it’s from your city then local tax free (please consult your financial advisor for details)
c. Relatively safe unless the city files bankruptcy
d. Lower rate of return
5. Corporate Bonds:
a. Pay well
b. Can be short term, intermediate term, or long term
c. Usually are “callable” – if the rate decreases, then can “call” the bond and issue a new one to save money
d. Ratings given by independent raters
– Higher score = Safer/lower risk, lower interest rate
– Lower score = Increased risk, higher interest rate
6. To buy bonds:
a. Full service brokerage houses
– Meryll Lynch, Wells Fargo, etc
– More expensive but personalized service
b. Discount brokerage houses
– Charles Schwab, Trade Monster, Fidelity, etc
– Less expensive, not personalized
c. Treasury bonds can be bought from http://www.treasurydirect.gov/ or some banks

Stocks
1. You become part owner of the company you bought stock in
a. May get voting rights on annual meeting agenda
2. More risky
b. If the company goes bankrupt, they have to pay their debts before paying stockholders
3. Different types:
a. Preferred vs common stocks have different rights
– May get some guarantee of certain % payout, may get better rate
– If a company goes bankrupt, after paying off debts, they pay preferred stockholders before common stockholders
– Preferred stockholders get dividends before common stockholders
b. Value stocks
– Pay dividends if good profit
c. Growth stocks
d. Dividend stocks
4. Buy stocks through same brokers as bonds
5. How to know if a stock is growth vs dividend
a. Lots of paid resources
b. May be able to tell from free source stock screeners (Google, Yahoo)
6. Stock option:
a. The right to buy or sell at a certain price after certain vesting period

Mutual Funds
1. Pools the resources of lots of investors to buy lots of different companies (gives you buying power)
a. Example: Vanguard, Fidelity, T Rowe Price, American Funds (American funds charge more, higher risk, but good return)
b. Fund manager what companies and proportions, then they recalculate that to decide the value of a share of this particular mutual fund
c. You do not buy shares, instead you specify how much money you want to invest (ex: $2000) and based on mutual fund share value, you get a certain # of shares (# shares = investment amount / value of mutual fund share).
– Mutual fund share value is calculated once daily at end of day after market is closed
– Because of this: You don’t know how many shares you’re buying when you invest. You don’t know how much money to expect when you withdraw (sell off shares of the mutual fund).
2. Different types of mutual funds: There are > 14,000 mutual funds
a. Stocks
b. Bond: municipal, corporate, divided
c. Blended: bonds and stocks
d. Specialty based (different financial sectors) or by certain countries:
– Pharmacy, etc
– Green: only green (eco-friendly) companies
– Socially responsible companies only
3. What to consider:
a. Look at how the mutual fund did over the past 3-5 years:
– return, risk grid, fund manager
– Value, growth, blend, and risk stratification
b. Look at fees:
– Front load fees: occur at time of investment (adding money) on top of management fees
– Back load fees: occur when you withdraw the money on top of management fees
– No load: no fee either when investing or withdrawing, only management fees
– More complex funds charge more fees
4. Managing the mutual fund:
a. Active vs Passive management
– Personal style
– As you grow older, typically more conservative (safer) vs when younger (have more time to recover from riskier investments if losses occur)

ETF (Exchange Traded Funds)
1. Like a mutual fund, in that it pools resources to buy lots of stocks of companies within a particular financial sectors or countries (gives you buying power). Fund manager decides which companies to include and what proportion
2. Traded actively like stocks on stock exchange
a. Like stocks, you pay a commission per trade
b. You buy shares of ETF and have real time fund share value, so you know immediately how much it will cost you to buy that many shares, and when you sell, you know immediately how much money you make
3. Advantages compared to mutual fund:
a. Mutual fund: most have minimum investment amount, capital gains/dividends are taxed, value determined by portfolio manager
b. ETF: Can no minimum investment required, time sales to avoid capital gains/losses
4. Disadvantages compared to mutual fund:
a. Mutual fund can have an automatic investment plan (you can set up auto deposit of particular dollar amount into fund on a schedule)
b. No automatic investment plan with ETF b/c buying individual shares

Index fund
1. Can be mutual fund (invest dollar amount) or ETF fund (buy # shares)
2. Generally are broader based (it is not only companies from a particular financial sector) so more accurately reflects the market as a whole
a. Ex: S&P 500, Russell 2000, etc
3. Generally safer because more diversified, lower gains
4. Buy through a brokerage company or mutual fund company or your bank.
5. Fee structure is like a mutual fund or ETF

Hedge Funds
1. Aggressive portfolio, complex funds, expensive
2. High risk investments but use various strategies to “hedge their bets” and protect investment
3. Require large minimum investment, limited to certain investors, money is not liquid (often require longer term that your money stays in the fund)

Commodities or Commodity Funds
1. Have a separate exchange for trading
2. Commodities are tangible objects that go up and down in value (oil, precious metals, corn, weather, etc)

Other ways to invest
1. Options
a. Call option: right to buy at a certain price after certain time period
b. Put option: right to sell at a certain price after certain time period
c. Can make a lot of money trading options but are more risky because need lots of attention and are more volatile
2. Futures
3. Currency trading
4. Real estate investing
a. Real estate investment trusts (REIT)
– Good option if you don’t want to be a landlord or flip property
– Residential vs commercial option
– You pay a % for them to do the work for you
– No tax advantage to investor

Retirement planning
1. Place your money into these types of accounts in this order for maximum benefit:
a. 401K: If your company provides a match, put however much money they match (free money!)
b. Roth IRA: best option if you’re eligible
c. Traditional IRA:
– If not eligible for Roth, this is next best option
– Forced to take minimum 4% out after age 70.5 years
d. Max out 401K if you still have money left over after above and investing
e. Other options:
– FSA (Flexible Spending Account): use if you know you’ll use the money, pretax money so it reduces your total income amount that gets taxed
– Dependent care accounts
– Education savings accounts: different with different states
– SEP (simplified empoloyee pension IRA): for business owners to cover selves (self-employed) and their employees, certain rules apply, contributions are tax deductible, generally function/taxed as traditional IRA