Reduce Debt Increase Wealth

Investing in Stocks

October 17, 2021 Charles McDonald Season 2 Episode 83
Reduce Debt Increase Wealth
Investing in Stocks
Show Notes Transcript

How to increase your net worth, investing into stock for the long term is one way. The other is to reduce your debt. Doing both at the same time may increase your net worth faster. This episode is the basic on investing in stocks and the benefits.

Article Links:

https://www.investopedia.com/articles/basics/06/invest1000.asp By Chad Langager

https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks

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Unknown:

Hello, I'm your host, Mr. Chuck, I retired accountant turn truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence, determination, investing in stocks. What's that all about? And how does that help your net worth? I saw some articles where it says reducing debt doesn't increase your net worth. I disagree with that statement. Because if you look at the formula, the figure your net worth, it's your total assets, the fair market value of all your assets, less all your liabilities, that's all the debt you owe, including student loans equals your net worth. So as your debt is decreasing, and the value of the assets, let's assume stay the same, your net worth is gone to increase some basic math problem. To begin with, not all assets will stay the same. Some or would go down in valuation. Well, others will go up in valuation. Your home for instance, is a asset that's mostly likely to go up in value or appreciate. While investing in stocks does something similar. You when you buy the stock, you want to buy it at a low price, hold on to it for years like you would a home and then sell it when the price is much higher than what you actually paid for it. That's a concept I'm referring to is buy low sell high. I have a couple articles I'm gonna reference and the first articles from Ince investopedia.com, basics of investing, how to start investing in stocks, a beginner guide, investing is a way to set aside money while you're busy with life that have money work for you so that you can fully reap the rewards of your labor in the future. And investing is a means to a happier ending. Legendary investor Warren Buffett divides investing as, quote, the process of laying out money now to receive more money in the future. Unquote. The goal of investing is to put your money to work and one or more types of investment vehicles in hopes of growing your money over time. The key part of that is growing money over time. And there you might have heard about day traders. day traders are people who buy stocks early in the day and then sell the stocks. A true day trader, at the end of the day, does not have any investments have no stocks, they buy and sell in the same day and hopes that the value of the stocks are gonna go up the market value, and they're gonna sell it at a higher price. There's some times that works and sometimes that doesn't. Another article I'm using for this episode is investor.gov investing basics. And which if you don't know anything about stocks or investing is a good place to come to because they're not trying to sign thing is a government website, which is not always good or bad. But it gives you the basic definitions and information of investing What are stocks. stock is a security in a single company. So you buy stock in one company, that's all your own is say 100 shares of one company that might have 2 million shares outstanding. So you would be a file of very little ownership. So why you want to buy stock? Well for capital appreciation for its occur when the stock rises a price. That's when the fair market value goes up for a dividend payment which comes when the company distributes some of it. earnings to shareholders and their ability to vote shares and influence the company. three big things. So why do companies issue stock? Well, they generally issue stock when they first formed the corporation to raise capital so they can start their business. And then other items are to pay off debt, launching new products expanding and new markets or regions, or enlarging facilities or building newer ones. So a good example would be, you have two different companies, and they're both in the same industry. One has been around a long time, and our production facility is old. The other one is fairly new. And our production facility is fairly new and up to date. What are those two would you invest in. Without with only that little bit of information, I wouldn't invest in the one that has the production facility up to date, because they're most likely to have a profit, because we're using the newest available technology. Now, that doesn't mean they're not going to have problems. That doesn't mean that they won't lose money. But this on the information I said, the one with the newer production facility is the one I would invest in, because the one with the older production facility may be on the end of their life, they may be losing customers, because they can't provide whatever the product is in a timely manner or whatever. Or they may have to issue more shares or more dead bonds, for example, in order to upgrade their facility, so it may take a longer period of time. And what kind of stocks are there? Well, you got common stocks and titles owners devote as shareholder meeting and receive dividends. Then there's a preferred stock which generally pay a higher price for they usually don't have voting rights but they receive dividend payments before shareholders do and have a priority over common shareholders if the company goes bankrupt, and its assets are liquidated. Common and preferred stocks may fall into one of the following categories. Now this is common and preferred stocks of one company. Each company may have these two different types of stocks. growth stocks have the earning growing at a faster rate than the market average they rarely pay a dividend. investors buy them in hopes of capital appreciation. a startup technology company is likely a growth stock, then you have income stocks, pay dividends consistently, investors buy them for the income that they generate. Then you have value stocks have a low price to earnings ratio, meaning they're cheaper to buy than stocks at a higher price earning ratio. value stocks may be growth or income stocks to their low p e ratio may reflect the fact they have fallen out of favor with investors for some reason. People buy value stocks and hope that the market has overreacted in the stock price real rebound. And you hear most common phrase blue chip companies or blue chip stocks or shares and large well known companies with a solid history of growth. They generally pay dividends but not always. And they don't always remain a blue chip stop. Well, the benefits and risk of stock stocks offer investor the greatest potential for growth capital appreciation over the long haul. investors will willing to stick with stocks over long periods of time, say 15 years generally have been rewarded with strong positive returns. But the stock prices move up and down as well. There's no guarantee that company whose stock you hold on will grow and do well. So you may lose money and your investments is a matter of risk that you're willing to take. Generally speaking, the market goes up and down every day. And generally speaking, the market goes up and down every week. But if you look at it from a 10 year average point, what was the average value of those market 10 years ago? And what is it today, you're gonna see it's higher. So over the long haul, it's gradually increasing over time, the daily may be jumped way high, and then way low, way high and way low from day to day. And that is why when you buy stocks, you need to diversify. You don't put all your eggs in one basket, if you have all your eggs in one basket, and you drop the basket. And the probability is all the eggs break in is fairly great. If you put your eggs in multiple baskets, and you only drop one basket, you only lose what's in that one basket. With that said, we're not investing all of our money into one company, you need to diversify, he needs to spread your money around and buy small chunks of multiple companies. And you want to buy small chunks and multiple companies that are in different industries, maybe some would be maybe 10% would be growth, maybe 10% would be income stocks, maybe 10% would be value stocks, and maybe 10% will be blue chip. And then you can take the one to the 40, the rest 60%. And maybe put it spread over different industries. So there's a lot to know. So how to buy well you can buy directly from the company, if you're an employee of the company, maybe they have a stock plan, you have a debit, once you buy the stocks, you can reinvest the dividends, most brokers handle that for you. You can buy them through a discount or a full service broker, or you can buy them through stock bonds. But one what's a stock fund a stock fund is a mutual fund that invest is primary and stocks. So I haven't got to that yet. But that's what I would do. So as I said before, you need to diversify, you need to spread your money around, you need to invest a percentage of your money in multiple different companies, the easiest way to do that is by buying a box and a mutual fund. a mutual fund is a fund that buys stocks and multiple companies within a industry. Or maybe it's a large cap or small cap or a mid cap, different industry, market segment, region, retail, manufacturing, mining, whatever one mutual fund would put that one segment that you're looking at, and buy multiple companies within that segment. So you only need to buy one item that one mutual fund. And then you can put 20% in that mutual fund, then maybe another market segment, you could put another 20%. And so your spread and your money, your investments all around the market. Because sometimes energy does really good, you might make a bunch of money there. But retail does really bad. Other times retail might be up in energy could be down, maybe public utilities are doing well. Maybe they're not. So you spread all your money around so that you can take advantage of whatever is going up in the market and which minimize whatever is going down in the market. If you put it all in one basket, and you make the wrong decision, then maybe all your invest money that you put into invest is on the way down and valuation and it could take three or four or five or 10 years down the road for you to recover back up to what you initially paid for it. You might have not known and maybe got in at a high price. So when you start doing this and once you figure all that out, it is recommended that you make purchases over a period of time and do it consistently. What that does is average out your purchase price. So if you say you want to buy your stock a once a month, at the 15th of the month or as close to the 15th of the month, every month for the next 10 years. That way is the market drops. You're buying the shares at a low price. if the market goes up, you're buying the shares at a higher price, but it averages itself out. So over the long term, you're gonna have a lower cost to your purchases than the fair market value at the time that you're trying to sell it. So you're taking the highs and the lows in your, your average them out by buying, you know, 100 chairs once a month, 100 chairs, 100 chairs, 100 chairs, every month you buy 100 chairs, and no matter what the price is. And over time, the cost of you buy in that will be averaged out. And you will show a profit 15 years down the road, investing in the market is a long term endeavor, don't think well, I'll put $1,000 in there today, and three months from now I can take out 3000? Well, he might if you get lucky, the chances of that is gonna be maybe 10% it's gonna be slim at best. So you want to put your money in slowly over time on a regular basis, and you want to leave it in there, no less than five years, the longer you leave it and the better off you're gonna be. And for example, when I was like younger, I put money in an IRA, because that's, you know, I could and I put in, I think it was a total of $8,000 of my my earned money that I put in after 1015 years that was worth 60,000, then the market dropped and it was worth 40,000, then I reinvest it and put it in different places. And now it's up to 200,000. Well, that 200,000 plus whatever else I put in there. So their initial $1,000.20 years is I've estimated probably grown to close to $100,000. That's the effect of compounding and capital appreciation. And every time you get a dividend paid to you, if you don't need the money or you want to increase your investments, you reinvested dividends. And that same fun. If you're in a mutual fund, if you bought common stock and one Corporation, then you want to reinvest the dividends you get from that company back into that company and buy more shares. And before you know it, you're gonna have a bunch of money. And then what kind of investor are you? before you commit your money, you need to answer questions because you got to know what type of risk that you're willing to take. So you have to ask yourself, Am I willing to take risk and loses money on the hopes of go up in value? If you say no, then maybe you're not meant to be in the stock market. When opening a brokerage account an online broker, Schwab or fidelity. They're gonna ask you about your investment goals and how much risk you're willing to take. And why do they ask you, they want to know what you're doing and why you're doing it. They want to know if you're going to be a long term customer, and what kind of risk you're willing to take. So they can advise you to put your money into the appropriate places, I don't recommend you doing your own investing on your own because it takes a lot of research and knowledge to do that. If you use a traditional broker, they're gonna steer you towards what makes them the most commission. So if you want to do it yourself, you need or don't want to do it yourself, you need to have a investment advisor that you pay a fee based on the value of what you have invested. It's based on the value of your portfolio, how much do you have invested and their fee is going to be like a half a 1%, a quarter, or 1% a quarter, somewhere along there. And they're called fiduciary Investment Advisors. And their goal is to do the best they can for on your behalf to make them investments based on your rate of risk that you're willing to take for the loan The time that you have to invest it. And for whatever reason you're trying to invest it. For example, my mother who was like 86 years old, we switched her from a traditional broker, which only was getting commissions based on trades, to a fiduciary broker. Well, the traditional broker was buying and selling stuff on a regular time that they didn't need to do and was costing her a bunch of money, she was they would take on risks that she at her age, shouldn't have been taken. I went to a fiduciary broker event antral advisor, and they put in investments to preserve her principal, principal is the initial amount that she had to invest to preserve her principle. So she got a little bit of return, but she never lost money because the market dropped, then the money was always there, sometimes the return wasn't a whole lot. But if you look at what you're getting from your savings account, it's got to be more than that. It's gonna be at least two or 3%, you need to make enough to stay ahead of inflation, or you're losing money. So I thought what I would do would be a fiduciary financial advisor. Or you can go the robo visor, which is on your app, your smartphone, you really don't talk to nobody, you can sign up, download the app sign right up and start transferring money in there right away. And a lot of them are they all have investment advice built into them. They have articles you can read, and they tell you about diversification, and they look and then that automatically looks at what you're buying. And it recommend you buy some other stuff in different industries, or a different segment, or whatever the deal is. And they work pretty good, I do have one of those awesome. And course you always gotta pay a fee for everything. Besides trading fees to purchase mutual funds or other costs associated with the type of investments mutual fund to professionally managed pool investor funds that invest in a focused manner, such as large cap US stocks. So this particular case, this fund is gonna invest in large cap US stocks, or any company that falls into that category, they're gonna buy shares off. And a lot of times you'll see a number called sales chart called lo fi. When you buy mutual funds, there are front end loads, but you can also see no loads and back end load funds. Be sure you understand whether a fun you're considered carries as sales load prior to buying it. Check out your brokers list of no load funds, and no transaction fee funds if you want to avoid these extra charge, okay, the sales fees is front end loads as you pay a fee when you initially invest your money. If you have to pay a fee, that's the one you want to do. You have no load mean, they don't charge you any fees, that'd be even better. But you want to avoid back end load funds, because they charge you a fee when you take out your money. And why is that bad. Because if you left it in there for 10 years, you put in $5,000. Now you have $50,000 remove, they're not going to get a fee on 5000 they're going to get the fee on 50,000. So be much more. If you use a fiduciary advisor financial advisor, they probably have deals with brokers that they work through where they do not are not charged a fee. Because of the volume they're doing the business volume, they may be be they may be managing $200 million dollars worth of funds investments. So they get the move the money around and you're not charge any fees because of the volume they are doing. So that's an advantage that you get. So you may pay a month quarterly or a monthly fee for their service. But in the long term, they might be saving you a lot more and fees that you're don't have to pay on a regular basis when they're doing the trades on your behalf. So that's the basics. The versification is what you need to know, you need to know understand what your risk tolerance is, the younger you are, the longer the more time you have, the more risk you can take, the more risk you take, the more reward you can have. The older you are, the more conservative the less risk you should be willing to take. And over time, this is always changing every 10 years, you should be changing your investment, risk tolerance to match the age and where you are in life. If you're investing for retirement, the younger you are, when you start it, the more consistent you are putting money in there, and doesn't matter if you're putting $5 a pay or $25 of pay, he just start doing it and keep doing it your whole working career and increase it as you can afford to. And you'll have way more money when you get ready to retire than you ever would have dreamed of. That is the magic of compounding. Over time over the long run the markets going up. No matter what it does on a day to day or week to week basis is going up generally is gonna go up. So as Warren Buffett's philosophy, he always bought stock in companies that are solid, financially with a good product, great management, and a long history. And he's made billions of dollars. This on that simple philosophy. So like he said, investing is the process of laying out money now, to receive more money in the future it's making is putting your money to work for you, instead of you working on stop your entire life. Make your money work for you. And over time, you'll be much better off. I'll be back in one moment with my final thoughts. If you listen to this podcast reduce that increased wealth on an Apple device. Scroll through all the episodes towards the bottom. And you can select write a review and leave your comments. And you can rate this podcast. I appreciate all feedback. And I thank you for your time and doing so. Well net worth may not be all that important to you. net worth is important to know. So you can gauge how your finances are doing over your lifetime. Reduce your debt is going to increase your net worth overall. But also, increasing your investments will help you increase your overall net worth. having too much debt will drag you down and make life much difficult. while increasing your net worth is gonna be helpful and increase in your investments will help you later in life at a time when you may need more money as who knows what your retirement is gonna look like. We all know there's gonna be inflation throughout the years. So it's gonna take more money to pay for the same things you're paying for today. investments can help you overcome these obstacles and help you gain more financial freedom later in life. So if you plan today and increase your investments and stay the long term, investments will grow and compound for you. Make your money work for you. So you don't have to