Welcome together, we're going to explore our personal finances and figure out how to improve them. Whether you're just getting started in life on your finances, or you may already have a home, a car payment, and you're struggling to get credit cards under control, or you may be getting a late start in life on saving for retirement, reduced debt increased wealth.com is a podcast to educate those to improve personal finances, whether it's eliminating debt, or making smart investments. Hello, Mr. Chuck here, this is going to be a follow up on my last episode. But before I get started into that, I'm going to go back to episodes and talk for a minute about budgeting apps and the ones that you take with you on your smartphone. The vantage of using a budgeting app that's on your smartphone that you can take with you. Not only can you check to see how much money have left in your budget to spend on that particular item, and that it remind you that maybe you shouldn't be spending as much as you were initially planning. And for those of you who have a bad habit of overspending. These budget apps will help you over time and may take two or three months to develop new habits. And better spending habits are very important. For all you who are struggling to make a budget, keep a budget or stay on a budget. To have a budgeting app on your smartphone and to look at it every day or look at before every purchase and use the 30 second rule. Do you really need to buy that item? Or can you do without it? And that's all I have to say about that? Now this episode, we're gonna be talking about investing. And some more information on investing. I'm going to talk about market segments and what are they? How the stock market is broken down for investors. And then we're going to talk about some common sense stuff. And I like to start there first. Everybody wants to make investing more complicated than it really is. Life is really simple. But we insist on making it complicated. That was confuses how many thousands of years ago with that Been a while we all try to overthink things in life, we tried to make the easy, more complex, because we think that if it was easy, everyone would be doing it. When it comes to your investment. Do not overthink it. Simple is almost always better in the long run. If you try to make your progress to complex, you'll never stick to it, or make it work once but never again. So apply a little common sense and use the easy to follow rules to keep it simple. And I found this in a wealth of common sense, calm, less is more keep investing simple. And I have a link in my show notes. And it was written by Ben Carlson. We have two articles by Ben Carlson today. Number one, have a plan that you can stick to through all markets. Creating a plan ahead of time will allow you to take your inherent emotions out of the equation. That's a very important thing to do. It all depends on why you're investing in the market are you trying to save for retirement that is long term fairly long term, or you're trying to say for your children's college education, and you want to get a bigger gain out of your savings, depending on the age of your children, that could be 1518 years could be a while. That would be considered by most people as long term. Also, if you're saving for something that's short term, less than a year, even less than three years, you probably shouldn't be putting that in the market, you should be trying to preserve your capital, meaning that you're not gonna risk losing what you're already saved. And you just want to earn some interest or dividends on what you already have that earned a dividend you'd have to buy common stock. So it'd be interest would be savings accounts, money market, high yield savings, things like that, too. Don't spend Late invest. What is speculation? Well, that is when you think something's gonna go up. So you buy it and hope it goes up and you don't have any knowledge about what it is you bought. I'll let Ben Graham handle this one. And investment operation is one which upon thorough analysis of promise, safety of principle, and a satisfactory return operations not meeting these requirements are speculative. Okay, so you analyze the investment, you know that your principal the amount invested is gonna be safe. And you got to have a decent return, say four or 8%. And John Bogle, founder of Vanguard says, By absolute mathematical definition, speculation is a loser's game, and investment is a winner's game. So knowing what you're investing and, and going for the long term, you would be considered an investor a$3, cost average. It isn't as fun as putting a big slug of cash in the market at once and seeing your investment rise. But the downsides is you could lose a lot using this strategy. So invest on a periodic basis, either monthly or bi weekly, depending on when you get your paycheck. When the markets are down, you'll be buying more shares of the fun you invest in, when the markets are higher, you'll be buying lower amounts of shares. And this will keep you honest, from making emotional short term decisions. And so what they're saying is, if you put all your money in there at once, and hope the market goes up, and then ends up going down, you'll lose a whole lot more over a period of time, put in$100, every pay over a period of 20 years, in your average purchase price is going to your purchase price is going to be averaged out over that long period of time, and you're gonna have a big gain over 1020 years. If you put it all in once and forget about it. Every time I tried doing that, the same thing always happens if the market drops to three 4% and you lose money. And it might take it two or three months to get back up to what would be considered zero. And then a few more months after that, or a year before you have any types of gain. So a little bit over a long period of time, you're gonna be better off, which comes to four Don't try to time the market. Do you have a friend or family member that loves to tell you about the things that they got into the casino and win big like it was because of the superior skill over the game. Think back of how many times they told you about how much they lost? Probably never. Because we're only like to brag about winning the same thing applies when investors time the market. They tell you how they sold out out at the top. But they also buy back in when a market fell more likely they held out even longer and missed the rebound timing the market requires being right twice when you get out. And when you get back in, you have to get the timing right in the direction right? It's a lot harder than what it sounds. Now your strategy should be buy low, sell high. If you buy a little bit at a time, like I just talked about. And over a long period of time, you're going to be buying low because the markets on a steady rise up. If you try to time the market every day the markets up. It might be up to three days in a row and then it might drop the fourth or fifth day. You never know. So it's almost impossible to time the market. So use the dollar cost averaging. Five use index funds or ETFs. By investing in this products you take the guessing game out of play, you get the market return less a minimal fee. There is no trying to anticipate what funds or industry will outperform because you'll be getting the market average no matter what index products have lower fees. Fewer transaction costs because they trade less, making them more tax efficient and are more diversified in 2011 84% of active mutual funds underperform the s&p 500. Vanguard Bogle on index fund says when the dumb money realize how dumb it is, and buys an index fund It becomes smarter than the smartest money and typically outperforms about three quarters of the street's brightest and highest paid stars, Enough said ETFs, or electronically traded funds, and electronically traded funds may only invest in a index. So they're only buying the companies within that particular index and you need to do a little bit of homework and find out what would be best for you. Getting Started, if you only have a little bit of money index fund would probably be a good choice, because like that just said, it gives you an average cost you're throughout that particular industry. And you might want to buy one index fund and one industry or market segment. And maybe after a while, buy another one in a different market segment, we're going to cover market segments later on, and spread your money around so that you're diversify in your investments. You don't want to put all your eggs in one basket, because if you drop that basket, he could break all your eggs, then you have nothing sick stay away from individual stocks, unless you have time to do the homework for a man. I know two individual stocks and mutual funds 100%. And I have a financial advisor doing it for me because I don't want to take time to do it. I'm just transferring money over to that account on a monthly basis and let the professionals figure it out. I've been doing fairly well. It should only invest on individual stocks, if you have the time to actually put in the research and then follow them on a consistent basis. Even though it is a tough job. If you do decide to invest in an individual stock, make sure it's only with five to 10% of your overall investment balance. So don't spread yourself too thin on a few stocks. And a Porton point to make if you all remember Emraan. That was a house of cards but all their employees invested in that company Emraan I think it was in the 80s it went defunct and everybody lost her retirement. So all their employees bought Emraan stock. And they thought they were worth a million dollars $2 million. And you had people retiring early because they thought they had enough money, they're live the rest of her life. And Emerson went bankrupt and it all fell apart and they lost 100% of everything they had. And everybody then had to go back to work, and you don't want to be in that set. So even if your company offers to sell you their stock, you can buy some, but make sure it's only maybe 5% of your overall portfolio, you want to be diversified. Number seven have goals in mind with your investment, issue set range of outcomes to benchmark yourself along with your investment journey. If you plan on retiring in 30 years come up with a reasonable goal for the amount of capital you need to retire comfortably based on a variety of market returns and savings assumption. That way you can check your progress along the way to see if you're on the right path to hitting that goals. If not say more, if you are stick to the plan. So have a goal in mind and have a target date and a target amount. And he should be able to figure out how much he should save every year and how much it's gaining so that you can hit those goals. And that's important to make sure you're on plan. Sometimes you might have to up it or stick to the same amount. As the first invocation matters. diversifying by asset class and within market is an easy way to spread your bets and lower the risk of major losses. A stock can go to zero, an entire index of stocks cannot. There are times when it doesn't matter and when everything goes down at the same time like 2008. But in most situation, diversification across markets give you the advantage of having investments that zip when others zag nine rebounds. Within your investment plan. You should have an asset allocation plan by dividing your investment funds and asset class into certain target weights at least once a year more if you want to stay closer to your risk tolerance rebalanced to those Wait, so you don't stray from your plan. Most fun companies offer automatic rebalancing of your funds. So you can set it up and forget about it. And what they're talking about here is, you've decided you want to be in three market segments, a B and see 3333 and 33% of all your money that you put in there after six months, a is that 28%. b is that 50% and C is that whatever the remaining would be. So you would sell some A, B and put it in a and c. So they even an out and keep it even across the board. That's what rebalance is all about. Okay, number 10. Don't pay attention to short term market movements. It's good to know what's going on with your investment. But markets rise and fall for a number of reasons. And they are not always what the headlines say. If you want to know what's going on find a reliable market observer who has a successful track record, don't watch at cn BC. They are the soundbite network and are usually preaching the wrong investments at the wrong time. Ignore that short term noise and focus on attaining long term goals. As the short term drop in the value of your retirement portfolio are really going to matter to you by the time you retire, and 1020 or 30 years, probably not probably recovered backup number 11. match your risk profile and time horizon for all investments? Should I buy Apple stock? Now? I get the same question all the time. I don't know until you tell me how long you plan to hold it for. Also, will this be a long term holding in a retirement account or a short term tray in a taxable account? Do you have a plan for when to sell a price or valuation target? Are you going to sell if the stock falls or buy more? If you can't answer these questions you don't you hadn't thought about how this or any investment fits your personal investment profile. Your decisions should be based more your decision should be based on more than will this stock go up this year. So one of the questions These are what you should be planning for how you're going to invest as a retirement long term, short term in a taxable account. Where you have a plan when to sell at a price point or target valuation, are you going to sell the stock falls? Or are you going to buy more, that's all in your plan. He should know the answer to all those questions before he even decide to buy, save enough for the company to match in your 401k. If you don't know how much to save for retirement, when you're starting out, at least put enough to get your company match. That's a nice hundred percent return on your money. No matter how the market behaves. From there, put aside just enough so that's it's a little painful. So say, Go grow into it. So you put in what your match is gonna be. And then you put a little bit more in the make a little painful. And that way you'll grow into your savings and it won't pay painful for the long term. That's when you're getting started. And that should be most of the time. Every time you get a pay raise part of that pay raise should be put into retirement plan. If you get a bonus, you could put a lump sum bonus in there to review investments on a periodic basis. Don't look at your investment accounts every day because that can be counterproductive. If you're hanging on to every tick in the stock market, you drive yourself crazy and make short term decisions. But it helps to look at your balance and performance on a quarterly or semi annual basis to make sure things are going according to plan. This helps with your periodic review of your goals. Make sure to aggregate all your accounts together into one place for a broad overview of all your assets. So the saying don't look at individual, say mutual funds or ETFs. But look at the overall picture of all of them combined together. Some could be down others could be way up. 14. Don't ever buy a product that makes a promise for an exact return number per year. We all had people tell us about that can't miss investment opportunity that the revisers got them into. They tell you they get 10% a year and never lose money or they or promise 8% a year and they never have to touch the principal balance. So my first question when I hear about these investors Is what are the fees you are paying? And is it even possible to take out from your principal balance? Be very suspect when someone makes you a precise investment promise. More than likely they're end up rich on your fees and you'd won't know your limitations on the investments on to your really need the money. If you can really guarantee you that return, why would they share this strategy with you? Sometimes knowing what not to do is half the battle. I only have one word annuities be where I know that details 15 automate, you can set it up. So the 401k plan, automate takes money out of your paycheck every time you get paid. It can also automate your savings to your IRA or taxable investment account on a periodic basis. And as I said before, rebounds it to your target asset on occasion is as simple as setting up an automated trigger on your fun company's website to make the changes for you to get back in line with your investment plan. automate the savings and investment decisions, you'll take the emotion and hassle out of your hands and worry about more important things you know, life. So true now about the rebalancing, setting that up to do it automatically. Yes, they do have that, but they require a minimum amount of investments before you can start doing it. It might be 10,000, or 5000. I don't know what it is. So you got to look at that if you're starting small, like five bucks a check. And these Robo funds, it's going to take it to three years before Hey, you can have that automated. Just a note there. My second article from Ben Carlson is what constitutes long term in the stock market. And there's again a wealth of common sense, calm. And my next article what constitutes long term in the stock market. Basically, we know a lot more about volatility than we do about the levers or returns over the short term. And remember, five years is still pretty short term. I think we all know this already and in applies by basic mathematics, but it helps to be reminded of the importance occasionally, all in all this 45 year period as our most reasonable looking realize efficient frontier yet. So what lessons do we take away from the above and also from living a fair amount from these 45 years real time? Five years is not very long time. You see crazy things over five years, of course, it often feels like a lifetime to actually live through it over the long haul, which I'll call 45 years here, though, there's no perfect agreement upon definition, some of the most basic parts of financial theory looks pretty darn good. The Long Haul is a really long time and sometime feels like several lifetimes to actually live through it. And no one consider five years to be short term in the world of finance. But in terms of risk management, it's a good starting point for setting expectations. And I agree with our dentists that fall tilty is far more predictable than performance over the short term, it can be difficult to think this way. So what they're saying here on the shorter the term you invest, the more volatile the more up and down the stock market's gonna have easier to predict. Yes, it's gonna be really volatile. I mean, in three years from now, you could lose a bunch of money. Three years from now you can make a bunch of money. They don't know. The same concepts of better explained visually. So I put and then it has a bunch of graphs in here with basically mathematically and it proves out so if you're interested in checking that out, it's a wealth a common set com 2015. And it's the what constitute long term in the stock market. Next up, we're gonna talk about the segments of the stock market and what makes them up is this a note here that I'm probably going to go over my normal episode, time amount of 30 minutes, I tried to keep my episodes between 25 and 30 minutes, but just kind of go way over. I think it's important enough to put all this into one episode, the 11 sectors of the stock market. The stock market is often divided into 11 major sectors representing key areas of the economy. Within each sector. There are a number of different publicly traded companies that share the same broad focus. Investors interested in gaining exposure to Pacific area of the economy are implementing a sector rotation strategy to position their portfolio. They want to consider exchange traded funds ETFs and the sector of their choice. This is etfdb.com he can get the link in my show notes. Number one financials the financial sector consists of banks, investment funds, insurance companies and real estate firms, among others in general, the majority of the revenue generated by the sector comes with from mortgages and loans that gain value as interest rate rise. Number two, utilities in the utility sector consist of electric gas and water company as well as integrated providers. In general this sector generates consistent reoccurring income by charging customers in business to provide higher than average yields. And also in this article, there is our ETF funds that you can consider buying. Three consumer discretionary consumer discretionary sector consists of retailers, media companies, consumer service providers, apparel companies and consumer durables. In general, these companies benefit from having an improving economy when consumer spending accelerates. So in a good up economy, that consumer discretionary market investments could be the way to go for consumer staples, that consumer staples sectors consist of food and beverage company, as well as companies that create product consumers are unwilling to cut from their budgets. And general these companies are defensive plays capable of withstanding an economic downturn at not only food, and beverage, but also like Procter and Gamble soap, toiletries, shampoo, hair, detergents and cleaning supplies. They're not going to lose any value in a down economy, maybe even pet food companies. Five energy the energy sector consists of oil and gas exploration and production company as well as integrated power firms, refineries and other operations. In general, these companies during generate revenue that's tied to the price of crude oil, natural gas and other commodities. Six healthcare the healthcare sector consists of biotechnology companies, hospital management firms, medical device manufacturers and many other in general the sector is considered to be both a growth, growth opportunity and defensive play since people will always require medical aid. Seven industrials. The industrial sector consists of aerospace defense, machinery construction, fabrication and manufacturing companies in general the industry, industry growth is driven by demand for building construction and manufacturing products like agricultural equipment. Also, companies that build equipment for other companies to produce something industrials, a technology that technology sector consists of electronic manufacturers, software developers and information technology firms in general, these business are driven by upgrade cycles, and general health of the economy. Although growth has been robust over the years, and that's probably what you hear the most about. I wouldn't go too heavy in there but do some Telecom. The telecom sector consists of wireless providers, cable companies, Internet service providers and satellite companies, among others. In general, these companies generate recurring revenue from consumers but some subset of the industry are facing rapid change. The cable companies are facing change internet service providers are probably alright satellite companies are facing change because people are starting to stream more 10 minutes of materials the material sector consists of mining refining, chemical, forestry and related companies are focused on discovering and developing raw materials. Since these companies are at the beginning of the supply chain, they are vulnerable to changes in the business cycle. And number 11 real estate. The real estate sector consistent companies invested in residential industrial and rep retail real estate The main source of revenue for these companies come from rent income and real estate capital appreciation. As a result, this sector is sensitive to interest rate changes. As far as real estate goes, if you're buying your first home or second home, or if you're buying a home, consider that your investment in real estate if you're just getting started in the market, you should probably go with three different sectors, I would do Telecom, maybe technology, health care, energy, consumer staples, you gotta do your homework reading is Arcola help you get to that point and make your plan. But you need to diversify, and be in three or more of these different markets, sectors of the economy goes down, you're not hurt 100% when a market goes up, you don't gain as much again as the price you pay for the downside. Again, for those of you with bad spending habits, having a budget app on your smartphone, and checking it every time you make a purchase will help you change your bad habits and create good spending habits. Before you invest in the stock market, you need to have a plan. Why are you investing? How long? Were you? When the market drops? What are you gonna do? Are you going to buy or sell a market goes up? What are you gonna do, you're gonna hold or sell or buy more, do dollar cost averaging a little bit over a consistent period of time to avoid putting large amounts in all at once. And just be smart about what you don't check it every day or you go crazy look quarterly or semi annually. And you'll see over time, if you're putting $50 or $100 into your investments every pay. And you look after six months, you can be surprised how much money you have. And it's going to grow a lot faster than what you think. Once you get up to $1 amount of say, 10,000, 15,000, 20,000. If you don't have a financial advisor, get yourself a financial advisor. It should be a fiduciary. They work on your behalf. And they'll make sure that everything we just talked about, they follow that to the tee, based on your risk tolerance and your goals. That's the end of another episode. I hope you found it useful. And if you'd like to share this episode with your friends, please do so. I'm open for any suggestions for improvement, or for information that you would like to talk about in future episodes. You can go to my Facebook page and leave me a message. I am more than glad to respond. To find my Facebook page go to reducedebti creasewealth.com and click on th Facebook icon.