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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Make the most of your investment portfolio with a mix of assets from stocks to real estate to cryptocurrency
There’s nothing more satisfying than seeing the balance of a financial account grow month over month. But before that can happen, you need to know the best places to invest your money. Who can you trust for solid, reliable investing advice?
Investing All-in-One For Dummies offers sound guidance for investors at every level. Whether you’re stumped by stocks, baffled by bonds, mystified about mutual funds, or curious about cryptocurrency, this book gives you a solid foundation in those investing concepts and many others. After reading the expert advice and considering your risk tolerance and timeline, you can confidently choose the best investments for your financial goals.
Containing advice from 10 different Dummies investing guides, Investing All-in-One For Dummies shows you how to:
- Set short- and long-term investing goals, invest to minimize your tax hit, and develop an investing strategy using a mix of investment vehicles
- Decide when to buy, hold, or sell an investment
- Choose the right mix of stocks, bonds, and mutual funds to create a diversified portfolio
- Identify real estate investment opportunities and find the capital to make purchases
- Execute trades through an online broker instead of using a traditional investment firm
- Evaluate modern investing trends like cryptocurrency and environmental, social, and governance (ESG) investing
For anyone who wants to dip their toes into the markets or who tends to leave their investment decisions in the hands of someone else, Investing All-in-One For Dummies is the must-read resource when you’re ready to make informed decisions and pick solid investments for your financial future.
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Investing All-in-One For Dummies®, 2nd Edition
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2022 by Eric Tyson and John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Control Number: 2022933655
ISBN 978-1-119-87303-7 (pbk); ISBN 978-1-119-87304-4 (ebk); ISBN 978-1-119-87305-1 (ebk)
Investing All-in-One For Dummies®
To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Investing All-in-One For Dummies Cheat Sheet” in the Search box.
Table of Contents
Cover
Title Page
Copyright
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Book 1: Getting Started with Investing
Chapter 1: Exploring Your Investment Choices
Getting Started with Investing
Building Wealth with Ownership Investments
Generating Income from Lending Investments
Considering Cash Equivalents
Choosing Where to Invest and Get Advice
Chapter 2: Weighing Risks and Returns
Evaluating Risks
Analyzing Returns
Compounding Your Returns
Chapter 3: The Workings of Stock and Bond Markets
How Companies Raise Money through the Financial Markets
Understanding Financial Markets and Economics
Book 2: Investing in Your 20s and 30s
Chapter 1: Using Investments to Accomplish Your Goals
Setting and Prioritizing Your Shorter-Term Goals
Investing in Retirement Accounts
Chapter 2: Minimizing Your Taxes When Investing
Understanding Investment Taxes
Reducing Your Taxes When Selling Investments
Chapter 3: Laying Out Your Financial Plans
First Priorities: Paying Off High-Cost Debt and Building a Safety Reserve
What about Paying Down Other Debts?
Sorting Out Your Financial Plans
Knowing the Impact of Investing for College Costs
Securing Proper Insurance
Chapter 4: Starting Out with Bank and Credit Union Accounts
Understanding FDIC Bank Insurance
Investing in Banking Account and Savings Vehicles
Negotiating with Bankers
Feeling Secure with Your Bank
Exploring Alternatives to Bank Accounts
Book 3: Checking Out Stock Investing
Chapter 1: Gathering Information on Stocks
Looking to Stock Exchanges for Answers
Grasping the Basics of Accounting and Economics
Staying on Top of Financial News
Reading (And Understanding) Stock Tables
Using News about Dividends
Evaluating Investment Tips
Chapter 2: Investing for Long-Term Growth
Becoming a Value-Oriented Growth Investor
Choosing Growth Stocks with a Few Handy Tips
Chapter 3: Investing for Income and Cash Flow
Understanding the Basics of Income Stocks
Analyzing Income Stocks
Exploring Some Typical Income Stocks
Chapter 4: Using Basic Accounting to Choose Winning Stocks
Recognizing Value When You See It
Accounting for Value
Book 4: Looking at Bond Investing
Chapter 1: Bond Fundamentals
Understanding What Makes a Bond a Bond
Why Hold Bonds?
Introducing the Major Players in the Bond Market
Buying Solo or Buying in Bulk
The Triumphs and Failures of Fixed-Income Investing
Realizing How Crucial Bonds Are Today
Viewing Recent Developments, Largely for the Better
Chapter 2: All about the Interest
The Tricky Business That Is Calculating Rates of Return
Measuring the Desirability of a Bond
Understanding Yield
Recognizing Total Return (This Is What Matters Most!)
Measuring the Volatility of Your Bond Holdings
Returning to the Bonds of Babylonia
Chapter 3: Checking Out Types of Bonds
Exploring the Many Ways of Investing with Uncle Sam
Industrial Returns: Corporate Bonds
Lots of Protection, a Touch of Confusion: Agency Bonds
Banking Your Money on Other People’s Mortgages
(Almost) Tax-Free Havens: Municipal Bonds
Chapter 4: Investing (Carefully!) in Individual Bonds
Navigating Today’s Individual Bond Market
Dealing with Brokers and Other Financial Professionals
Doing It Yourself Online
Perfecting the Art of Laddering
Chapter 5: Picking a Bond Fund That Will Serve You for Life
Defining the Basic Kinds of Funds
What Matters Most in Choosing a Bond Fund of Any Sort
Book 5: Moving on to Mutual Funds and Exchange-Traded Funds
Chapter 1: Considering Mutual Funds’ Pros and Cons
Introducing Mutual Funds and Exchange-Traded Funds
Getting a Grip on Funds
Opting for Mutual Funds
Addressing the Drawbacks
Chapter 2: Finding the Best Mutual Funds
Evaluating Gain-Eating Costs
Weighing Performance and Risk
Recognizing Manager Expertise
Chapter 3: Buying Mutual Funds from the Best Firms
Finding the Best Buys
Discount Brokers: Mutual Fund Supermarkets
Places to Pass By
Chapter 4: What the Heck Is an ETF, Anyway?
The Nature of the Beast
Choosing between the Classic and the New Indexes
Preferring ETFs over Individual Stocks
Distinguishing ETFs from Mutual Funds
Why the Big Boys Prefer ETFs
Why Individual Investors Are Learning to Love ETFs
Getting the Professional Edge
Passive versus Active Investing: Your Choice
Do ETFs Belong in Your Life?
Chapter 5: Risk Control, Diversification, and Other Things to Know about ETFs
Risk Is Not Just a Board Game
Smart Risk, Foolish Risk
How Risk Is Measured
Mixing and Matching Your Stock ETFs
Book 6: Investing Online
Chapter 1: Getting Ready for Online Investing
Why Investing Online Is Worth Your While
Getting Started
Gut-Check Time: How Much Risk Can You Take?
Passive or Active? Deciding What Kind of Investor You Plan to Be
Chapter 2: Getting Your Device Ready for Online Investing
Turning Your Device into a Trading Station
Tracking the Market’s Every Move
Monitoring Market-Moving News
Checking In on Wall Street Chatter
Keeping Tabs on the Regulators
Searching the Internet High and Low
Keeping the Bad Guys Out: Securing Your PC
Mastering the Basics with Online Tutorials and Simulations
Chapter 3: Connecting with an Online Broker
Finding the Best Broker for You
Separating the Types of Brokerages
Avoiding Hidden Fees
Finding Out What Reviewers Think
Is Your Money Safe? Checking Out Your Broker
Cutting the Cord: Mobile Trading
Pay Attention to Where Your Cash Is Parked: Money Market Funds
Buying Stocks and Mutual Funds without a Broker
Opening and Setting Up Your Account
Chapter 4: Entering and Executing Trades
Understanding How Stock Trades and Shares Are Handled
Getting It Done: Executing Your Trades
Book 7: Introducing Fundamental Analysis
Chapter 1: Understanding Fundamental Analysis
Why Bother with Fundamental Analysis?
Knowing the Tools of the Fundamental Analysis Trade
Making Fundamental Analysis Work For You
Chapter 2: Getting Up to Speed with Fundamental Analysis
What Is Fundamental Analysis?
Comparing Fundamental Analysis with Other Ways of Picking Investments
Putting Fundamental Analysis to Work For You
Making Money with Fundamental Analysis
The Fundamental Analysis Toolbox
Chapter 3: Gaining an Edge with Fundamental Analysis
Better Investing with Fundamentals
Relying on the Basic Info the Pros Use
Figuring Out When to Buy or Sell a Stock
Chapter 4: Getting Your Hands on Fundamental Data
Getting in Sync with the Fundamental Calendar
Getting Up to Speed with Basic Accounting and Math
Knowing How to Get the Fundamental Data You Need
Book 8: Investing in Real Estate
Chapter 1: Evaluating Real Estate as an Investment
Understanding Real Estate’s Income- and Wealth-Producing Potential
Recognizing the Caveats of Real Estate Investing
Comparing Real Estate to Other Investments
Determining Whether You Should Invest in Real Estate
Fitting Real Estate into Your Plans
Chapter 2: Covering Common Real Estate Investments
Identifying the Various Ways to Invest in Residential Income Property
Surveying the Types of Residential Properties You Can Buy
Considering Commercial Real Estate
Buying Undeveloped or Raw Land
Chapter 3: Identifying Sources of Capital
Calculating the Costs of Admission
Rounding Up the Required Cash by Saving
Overcoming Down Payment Limitations
Chapter 4: Location, Location, Value
Deciding Where to Invest
Finding Properties to Add Value
Evaluating a Region: The Big Picture
Investigating Your Local Market
Evaluating Neighborhoods
Mastering Seller’s and Buyer’s Markets
Book 9: Investing in Trends
Chapter 1: Taking the Nickel Tour of Cannabis Investing
Weighing the Pros and Cons of Investing in Cannabis
Investing in Businesses That Touch the Plant or Those That Don’t
Exploring Your Investment Options
Finding Investment Opportunities
Researching Investment Opportunities
Planning Your Investment Strategy
Investing in a Cannabis Business
Chapter 2: The Political, Cultural, and Regulatory Landscape of Cannabis Investing
Recognizing the Impact of Laws on the Industry
Riding the Waves of Politics and Culture
Accounting for the High Costs of Doing Business
Chapter 3: What Is a Cryptocurrency?
Beginning with the Basics of Cryptocurrencies
Gearing Up to Make Transactions
Making a Plan Before You Jump In
Chapter 4: How Cryptocurrencies Work
Explaining Basic Terms in the Cryptocurrency Process
Cruising through Other Important Crypto Concepts
Stick a Fork in It: Digging into Cryptocurrency Forks
Chapter 5: Entering the World of ESG Investing
Surveying the Current ESG Landscape
Exploring What ESG Is (and Isn’t)
Understanding ESG’s Impact on the Environment, Society, and Governance
Using International Standards to Determine ESG Objectives
Index
About the Authors
Connect with Dummies
End User License Agreement
List of Tables
Book 1 Chapter 2
TABLE 2-1 Largest U.S. Stock Market Declines
*
TABLE 2-2 Inflation’s Corrosive Effect on Your Money’s Purchasing Power
TABLE 2-3 How Compounding Grows Your Investment Dollars
Book 2 Chapter 2
TABLE 2-1 2021 Federal Income Tax Rates for Single and Married Households Filing...
Book 3 Chapter 1
TABLE 1-1 A Sample Stock Table
TABLE 1-2 The Life of the Quarterly Dividend
Book 3 Chapter 2
TABLE 2-1 Grobaby, Inc., Income Statement
TABLE 2-2 Grobaby, Inc., Balance Sheet
Book 3 Chapter 3
TABLE 3-1 Comparing Yields
Book 3 Chapter 4
TABLE 4-1 XYZ Balance Sheet — December 31, 2021
TABLE 4-2 XYZ Income Statement — December 31, 2021
Book 5 Chapter 2
TABLE 2-1 Comparing the Van Wagoner Emerging Growth Fund’s Performance
Book 5 Chapter 4
TABLE 4-1 ETFs versus Mutual Funds versus Individual Stocks
TABLE 4-2 Rock-Bottom-Priced ETFs
TABLE 4-3 Holdings of the iShares Dow Jones U.S. Energy Sector ETF as of Mid-Aug...
Book 5 Chapter 5
TABLE 5-1 Standard Deviation of Two Hypothetical ETFs
TABLE 5-2 Recent Performance of Various Investment Styles
TABLE 5-3 Recent Performance of Various Market Sectors
Book 6 Chapter 2
TABLE 2-1 Key Market Indexes
TABLE 2-2 SEC Forms You Can Use
Book 6 Chapter 3
TABLE 3-1 Deep Discounters
TABLE 3-2 Discounters
Book 7 Chapter 1
TABLE 1-1 Watch Out! A Falling Knife!
Book 7 Chapter 3
TABLE 3-1 Fundamentals Matter: Value Beats Growth
TABLE 3-2 Measuring the Size of Companies
TABLE 3-3 Big Buffett Bets
Book 7 Chapter 4
TABLE 4-1 Filing Deadlines for Key Documents
Book 8 Chapter 1
TABLE 1-1 How a Rental Property’s Income and Wealth Build Over Time
List of Illustrations
Book 1 Chapter 2
FIGURE 2-1: What are the odds of making or losing money in the U.S. markets? In...
FIGURE 2-2: The longer you hold stocks, the more likely you are to make money.
FIGURE 2-3: Even the bull market of the 1990s wasn’t kind to every company.
FIGURE 2-4: A historical view of bond performance: Inflation has eroded bond re...
FIGURE 2-5: History shows that stocks have been a consistent long-term winner.
FIGURE 2-6: Plenty of investing opportunities exist outside the United States.
Book 2 Chapter 4
FIGURE 4-1: A sample Truth in Savings Disclosure statement from an online bank....
Book 4 Chapter 4
FIGURE 4-1: A typical bond ladder.
Book 5 Chapter 2
FIGURE 2-1: How to spot load funds.
Book 5 Chapter 4
FIGURE 4-1: The secret to ETFs’ tax friendliness lies in their very structure.
Book 5 Chapter 5
FIGURE 5-1: The risk levels of a sampling of ETFs.
FIGURE 5-2: The style box or grid.
Book 6 Chapter 2
FIGURE 2-1: Setting financial websites as favorites is a matter of just clickin...
FIGURE 2-2: The Fed’s website makes it easy to track important interest rates.
Book 7 Chapter 2
FIGURE 2-1: A square with three slices is the best way to understand the relati...
Book 8 Chapter 4
FIGURE 4-1: Property knowledge sheet.
Book 9 Chapter 2
FIGURE 2-1: Check out an online map to determine overall legal status.
Book 9 Chapter 4
FIGURE 4-1: An example of a hard fork.
FIGURE 4-2: An example of a soft fork.
Book 9 Chapter 5
FIGURE 5-1: ESG Cube with intersections between factors.
FIGURE 5-2: Industry sectors per the SASB’s Materiality Map.
FIGURE 5-3: Popular ESG investment strategies.
FIGURE 5-4: Material indicators per the SASB’s Materiality Map.
Guide
Cover
Title Page
Copyright
Table of Contents
Begin Reading
Index
About the Authors
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Introduction
Successful investing takes diligent work and knowledge, like any other meaningful pursuit. Investing All-in-One For Dummies presents basic investing topics — such as building an emergency fund, determining your financial goals, and choosing a broker (if you’re not a do-it-yourself investor) — but also introduces some slightly more advanced subjects, like fundamental analysis, that can enhance your investing strategies. In between, you find the basics of investing in stocks, bonds, mutual funds, exchange-traded funds, real estate, and trends like cryptocurrencies.
This book can help you avoid the mistakes others have made and can point you in the right direction as you build your portfolio. Explore the pages of this book and find the topics that most interest you within the world of investing.
In all the years that we’ve counseled and educated investors, the single difference between success and failure, between gain and loss, has boiled down to two words: applied knowledge. Take this book as your first step in a lifelong learning adventure.
About This Book
To build wealth, you don’t need a fancy college or graduate-school degree, and you don’t need a rich parent, biological or adopted! What you do need is a desire to read and practice the many simple yet powerful lessons and strategies in this book.
This book is designed to give you a realistic approach to making money. It provides sound, practical investing strategies and insights that have been market-tested and proven from more than 100 years of stock market history. You’re not expected to read it from cover to cover. Instead, this book is designed as a reference tool. Feel free to read the chapters in whatever order you choose. You can flip to the sections and chapters that interest you or those that include topics that you need to know more about.
Investing intelligently isn’t rocket science. By all means, if you’re dealing with a complicated, atypical issue, get quality professional help. Hiring someone is dangerous if you’re financially challenged. If you do decide to hire someone, you’ll be much better prepared if you educate yourself. Doing so can also help you focus your questions and assess that person’s competence.
Foolish Assumptions
No matter your skill or experience level with investing, you can get something out of Investing All-in-One For Dummies. We assume that some readers haven’t invested in anything other than baseball cards or Pez dispensers and have no clue of where to even start. If that describes you, the first part of the book is custom-made for you and takes extra care to step through all the key points in as much plain English as possible. (When we have no choice but to use investing jargon, we tell you what it means.) But we also assume that more advanced investors may pick this book up, too, looking to discover a few things. The book takes on more advanced topics as you progress through it.
Here are some assumptions we made about you as we crafted this book:
You have about seven cents in your checking account and you’re working to pay off credit card debt or student loans (or both), but you know you need to start saving for the future.
You’re debt-free, and you’d like to start a portfolio.
You may have some investments, but you’re looking to develop a full-scale investment plan.
You’re tired of feeling overwhelmed by your investing choices and stressed out by the ever-changing economic and investing landscape, and you want to get more comfortable with your investment selections.
You want to evaluate your investment advisor’s advice.
You have a company-sponsored investment plan, like a 401(k), and you’re looking to make some decisions or roll it over into a new plan.
If one or more of these descriptions sound familiar, you’ve come to the right place.
Icons Used in This Book
Throughout this book, icons help guide you through the maze of suggestions, solutions, and cautions. We hope the following images make your journey through investment strategies smoother.
We think the name says it all, but this icon indicates something really, really important — don’t you forget it!
Skip it or read it; the choice is yours. You’ll fill your head with more stuff that may prove valuable as you expand your investing know-how, but you risk overdosing on stuff that you may not need right away.
This icon denotes strategies that can enable you to build wealth faster and leap over tall obstacles in a single bound. (Okay, maybe just the first one.)
This icon indicates treacherous territory that has made mincemeat out of lesser mortals who have come before you. Skip this point at your own peril.
Beyond the Book
In addition to the material in the print or e-book you’re reading right now, this product comes with a free access-anywhere Cheat Sheet that can set you on the path to successful investing. To get this Cheat Sheet, simply go to www.dummies.com and enter “Investing All-in-One For Dummies Cheat Sheet” in the Search box.
Where to Go from Here
If you’re a new investor, you may want to consider starting from the beginning. That way, you’ll be ready for some of the more advanced topics introduced later in the book. But you don’t have to read this book from cover to cover. If you have a specific question or two that you want to focus on today, or if you want to find some additional information tomorrow, that’s not a problem. Investing All-in-One For Dummies makes it easy to find answers to specific questions. Just turn to the table of contents or index to locate the information you need. You can get in and get out, just like that.
Book 1
Getting Started with Investing
Contents at a Glance
Chapter 1: Exploring Your Investment Choices
Getting Started with Investing
Building Wealth with Ownership Investments
Generating Income from Lending Investments
Considering Cash Equivalents
Choosing Where to Invest and Get Advice
Chapter 2: Weighing Risks and Returns
Evaluating Risks
Analyzing Returns
Compounding Your Returns
Chapter 3: The Workings of Stock and Bond Markets
How Companies Raise Money through the Financial Markets
Understanding Financial Markets and Economics
Chapter 1
Exploring Your Investment Choices
IN THIS CHAPTER
Defining investing
Seeing how stocks and real estate build long-term wealth
Understanding the role of lending investments and cash equivalents
Knowing where to invest and get advice
In many parts of the world, life’s basic necessities — food, clothing, shelter, healthcare, and taxes — consume the entirety of people’s meager earnings. Although some Americans do truly struggle for basic necessities, the bigger problem for other Americans is that they consider just about everything — eating out, driving new cars, hopping on airplanes for vacation — to be a necessity.
This book is here to help you recognize that investing — that is, putting your money to work for you — is a necessity. If you want to accomplish important personal and financial goals, such as owning a home, starting your own business, helping your kids through college (and spending more time with them when they’re young), retiring comfortably, and so on, you must know how to invest well.
It’s been said, and too often quoted, that the only certainties in life are death and taxes. You can add one more to these two certainties: being confused by and ignorant about investing. Because investing is a confounding activity, you may be tempted to look with envious eyes at those people in the world who appear to be savvy with money and investing. Keep in mind that everyone starts with the same level of financial knowledge: none! No one was born knowing this stuff! The only difference between those who know and those who don’t is that those who know have either devoted their time and energy to acquiring useful knowledge about the investment world or have had their parents instill a good base of investing knowledge.
Getting Started with Investing
Before the rest of this chapter discusses the major investing alternatives, this section starts with something that’s quite basic yet important. What exactly does “investing” mean? Simply stated, investing means you have money put away for future use.
You can choose from tens of thousands of stocks, bonds, mutual funds, exchange-traded funds, and other investments. Unfortunately for the novice, and even for the experts who are honest with you, knowing the name of the investment is just the tip of the iceberg. Underneath each of these investments lurks a veritable mountain of details.
If you wanted to and had the ability to quit your day job, you could make a full-time endeavor out of analyzing economic trends and financial statements and talking to business employees, customers, suppliers, and so on. However, you shouldn’t be scared away from investing just because some people do it on a full-time basis. Making wise investments need not take a lot of your time. If you know where to get high-quality information and you purchase well-managed investments, you can leave the investment management to the best experts. Then you can do the work that you’re best at and have more free time for the things you really enjoy doing.
An important part of making wise investments is knowing when you have enough information to do things well on your own versus when you should hire others. For example, foreign stock markets are generally more difficult to research and understand than domestic markets. Thus, when investing overseas, hiring a good money manager, such as through a mutual or exchange-traded fund, makes more sense than going to all the time, trouble, and expense of picking individual international stocks.
This book is here to give you the information you need to make your way through the complex investment world. The rest of this chapter clears a path so you can identify the major investments, understand the strengths and weaknesses of each, and get information on seeking advice.
Building Wealth with Ownership Investments
If you want your money to grow faster than the rate of inflation over the long term and you don’t mind a bit of a roller-coaster ride from time to time in your investments’ values, ownership investments are for you. Ownership investments are those investments where you own an interest in some company or other asset (such as stock or real estate) that has the ability to generate revenue and profits.
Observing how the world’s richest have built their wealth is enlightening. Not surprisingly, many of the champions of wealth around the globe gained their fortunes largely through owning a piece (or all) of a successful company that they (or others) built.
In addition to owning their own businesses, many well-to-do people have built their nest eggs by investing in real estate and the stock market. With softening housing prices in many regions in the late 2000s, some folks newer to the real estate world incorrectly believe that real estate is a loser, not a long-term winner. Likewise, the stock market goes through down periods but does well over the long term. (See Chapter 2 in Book 1 for the scoop on investment risks and returns.)
And, of course, some people come into wealth through an inheritance. Even if your parents are among the rare wealthy ones and you expect them to pass on big bucks to you, you need to know how to invest that money intelligently.
If you understand and are comfortable with the risks and take sensible steps to diversify (you don’t put all your investment eggs in the same basket), ownership investments are the key to building wealth. For most folks to accomplish typical longer-term financial goals, such as retiring, the money that they save and invest needs to grow at a healthy clip. If you dump all your money in bank accounts that pay little if any interest, you’re more likely to fall short of your goals.
Not everyone needs to make their money grow, of course. Suppose that you inherit a significant sum and/or maintain a restrained standard of living and work well into your old age simply because you enjoy doing so. In this situation, you may not need to take the risks involved with a potentially faster-growth investment. You may be more comfortable with safer investments, such as paying off your mortgage faster than necessary.
Entering the stock market
Stocks, which are shares of ownership in a company, are an example of an ownership investment. If you want to share in the growth and profits of companies like Skechers (footwear), you can! You simply buy shares of their stock through a brokerage firm. However, even if Skechers makes money in the future, you can’t guarantee that the value of its stock will increase.
Some companies today sell their stock directly to investors, allowing you to bypass brokers. You can also invest in stocks via a stock mutual fund (or an exchange-traded fund), where a fund manager decides which individual stocks to include in the fund.
You don’t need an MBA or a PhD to make money in the stock market. If you can practice some simple lessons, such as making regular and systematic investments and investing in proven companies and funds while minimizing your investment expenses and taxes, you should make decent returns in the long term.
However, you shouldn’t expect that you can “beat the markets,” and you certainly are not likely to beat the best professional money managers at their own full-time game. This book shows you time-proven, non-gimmicky methods to make your money grow in the stock market as well as in other financial markets. Books 3 and 5 explain more about stocks and mutual funds.
Owning real estate
People of varying economic means build wealth by investing in real estate. Owning and managing real estate is like running a small business. You need to satisfy customers (tenants), manage your costs, keep an eye on the competition, and so on. Some methods of real estate investing require more time than others, but many are proven ways to build wealth.
John, who works for a city government, and his wife, Linda, a computer analyst, have built several million dollars in investment real estate equity (the difference between the property’s market value and debts owed) over the decades. “Our parents owned rental property, and we could see what it could do for you by providing income and building wealth,” says John. Investing in real estate also appealed to John and Linda because they didn’t know anything about the stock market, so they wanted to stay away from it. The idea of leverage — making money with borrowed money — on real estate also appealed to them.
John and Linda bought their first property, a duplex, when their combined income was just $35,000 per year. Every time they moved to a new home, they kept the prior one and converted it to a rental. Now in their 50s, John and Linda own seven pieces of investment real estate and are multimillionaires. “It’s like a second retirement, having thousands in monthly income from the real estate,” says John.
John readily admits that rental real estate has its hassles. “We haven’t enjoyed getting some calls in the middle of the night, but now we have a property manager who can help with this when we’re not available. It’s also sometimes a pain finding new tenants,” he says.
Overall, John and Linda figure that they’ve been well rewarded for the time they spent and the money they invested. The income from John and Linda’s rental properties also allows them to live in a nicer home.
Ultimately, to make your money grow much faster than inflation and taxes, you must take some risk. Any investment that has real growth potential also has shrinkage potential! You may not want to take the risk or may not have the stomach for it. In that case, don’t despair: This book discusses lower-risk investments as well. You can find out about risks and returns in Chapter 2 of Book 1. Book 8 covers investing in real estate in more detail.
WHO WANTS TO INVEST LIKE A MILLIONAIRE?
Having a million dollars isn’t nearly as rare as it used to be. In fact, according to the Spectrem Group, a firm that conducts research on wealth, more than 11 million U.S. households now have at least $1 million in wealth (excluding the value of their primary home). More than 1.5 million households have $5 million or more in wealth.
Interestingly, households with wealth of at least $1 million rarely let financial advisors direct their investments. Only one of ten such households allows advisors to call the shots and make the moves, whereas 30 percent don’t use any advisors at all. The remaining 60 percent consult an advisor on an as-needed basis and then make their own moves.
As in past surveys, recent wealth surveys show that affluent investors achieved and built on their wealth with ownership investments, such as their own small businesses, real estate, and stocks.
Generating Income from Lending Investments
Besides ownership investments (which are discussed earlier in this chapter), the other major types of investments include those in which you lend your money. Suppose that, like most people, you keep some money in a bank, either locally or online — most likely in a checking account but perhaps also in a savings account or certificate of deposit (CD). No matter what type of bank account you place your money in, you’re lending your money to the bank.
How long and under what conditions you lend money to your bank depends on the specific bank and the account that you use. With a CD, you commit to lend your money to the bank for a specific length of time — perhaps six months or even one or more years. In return, the bank probably pays you a higher rate of interest than if you put your money in a bank account offering you immediate access to the money. (You may demand termination of the CD early; however, you’ll usually be penalized.)
As Book 4 discusses in more detail, you can also invest your money in bonds, another type of lending investment. When you purchase a bond that’s been issued by the government or a company, you agree to lend your money for a predetermined period of time and receive a particular rate of interest. A bond may pay you 4 percent interest over the next ten years, for example.
An investor’s return from lending investments is typically limited to the original investment plus interest payments. If you lend your money to Netflix through one of its bonds that matures in, say, ten years, and Netflix triples in size over the next decade, you won’t share in its growth. Netflix’s stockholders and employees reap the rewards of the company’s success, but as a bondholder, you don’t; you simply get interest and the face value of the bond back at maturity.
Many people keep too much of their money in lending investments, thus allowing others to reap the rewards of economic growth. Although lending investments appear safer because you know in advance what return you’ll receive, they aren’t that safe. The long-term risk of these seemingly safe money investments is that your money will grow too slowly to enable you to accomplish your personal financial goals. In the worst cases, the company or other institution to which you’re lending money can go under and stiff you for your loan.
THE DOUBLE WHAMMY OF INFLATION AND TAXES
Bank accounts and bonds that pay a decent return are reassuring to many investors. Earning a small amount of interest sure beats losing some or all of your money in a risky investment.
The problem is that money in a savings account, for example, that pays 1.5 percent isn’t actually yielding you 1.5 percent. It’s not that the bank is lying; it’s just that your investment bucket contains some not-so-obvious holes.
The first hole is taxes. When you earn interest, you must pay taxes on it (unless you invest the money in municipal bonds that are federal and state tax-free or in a retirement account, in which case you generally pay the taxes later when you withdraw the money). If you’re a moderate-income earner, you may end up losing about a third of your interest to taxes. Your 1.5 percent return is now down to 1 percent.
But the second hole in your investment bucket can be even bigger than taxes: inflation. Although a few products become cheaper over time (computers, for example), most goods and services increase in price. Inflation in the United States has been running about 2 percent per year over recent years (3 percent over the much longer term). Inflation depresses the purchasing power of your investments’ returns. If you subtract the 2 percent “cost” of inflation from the remaining 1 percent after payment of taxes, you’ve lost 1 percent on your investment.
To recap: For every dollar you invested in the bank a year ago, despite the fact that the bank paid you 1.5 pennies of interest, you’re left with only 99 cents in real purchasing power for every dollar you had a year ago. In other words, thanks to the inflation and tax holes in your investment bucket, you can buy less with your money now than you could have a year ago, even though you’ve invested your money for a year.
Considering Cash Equivalents
Cash equivalents are any investments that you can quickly convert to cash without cost to you. With most bank checking accounts, for example, you can conduct online transactions to pay bills or do the old-fashioned writing of a check or withdraw cash through an ATM machine or from retailers like a grocery store that enable you to get cash back when making a purchase.
Money market mutual funds (more commonly known as money market funds) are another type of cash equivalent. Investors, both large and small, invest hundreds of billions of dollars in money market mutual funds because the best money market funds historically have produced higher yields than bank savings accounts. (Some online banks offer higher yields, but you must be careful to understand ancillary service fees that can wipe away any yield advantage.) The yield advantage of a money market fund over a savings account almost always widens when interest rates increase because banks move to raise savings account rates about as fast as molasses on a cold winter day.
Why shouldn’t you take advantage of a higher yield? Many bank savers sacrifice this yield because they think that money market funds are risky — but they’re not. Money market mutual funds generally invest in safe things such as short-term bank certificates of deposit, U.S. government–issued Treasury bills, and commercial paper (short-term bonds) that the most creditworthy corporations issue.
Another reason people keep too much money in traditional bank accounts is that the local bank branch office or online bank makes the cash seem more accessible. Money market mutual funds, however, offer many quick ways to get your cash. Most money market mutual funds can be accessed online, just like most bank accounts. You can also write a check (most funds stipulate the check must be for at least $250), or you can call the fund and request that it mail or electronically transfer your money.
Move extra money that’s dozing away in your bank savings account into a higher-yielding money market mutual fund. Even if you have just a few thousand dollars, the extra yield more than pays for the cost of this book. If you’re in a high tax bracket, you can also use tax-free money market funds. (See Chapter 4 in Book 2 to find out about money market funds.)
Choosing Where to Invest and Get Advice
Selecting the firm or firms through which to do your investing is a hugely important decision. So is the decision about from whom to get or pay for investing advice. The following sections address both of these topics.
Finding the best fund companies and brokers
Insurance companies, banks, investment brokerage firms, mutual funds — the list of companies that stand ready to help you invest your money is nearly endless. Most people stumble into a relationship with an investment firm. They may choose a company because their employer uses it for company retirement plans or they’ve read about or been referred to a particular company. Maybe one of your family members or friends recommended or got you started with a particular investment company.
When you invest in certain securities — such as stocks and bonds and exchange-traded funds (ETFs) — and when you want to hold mutual funds from different companies in a single account, you need brokerage services. Brokers execute your trades to buy or sell stocks, bonds, and other securities and enable you to centralize your holdings of mutual funds, ETFs, and other investments. Your broker can also assist you with other services that may interest you.
Deciding which investment company is best for you depends on your needs and wants. In addition to fees, consider how important having a local branch office is to you. If you want to invest in mutual funds, you’ll want to choose a firm that offers access to good funds, including money market funds in which you can deposit money awaiting investment or proceeds from a sale.
For the lowest trading commissions, you generally must place your trades online. But you should be careful. A low brokerage fee of, say, $7 or $10 per trade doesn’t really save you money if you trade a lot and rack up significant total commissions. (As you may know, some brokers are offering free online trading for stocks and certain other securities, but of course, they have to make this up elsewhere with fees for other needed services and by paying you little to nothing on your cash balances.) Also, you pay more in taxes when you trade more frequently and realize shorter-term (one year or less) profits.
Trading online is an easy way to act impulsively and emotionally when making important investment decisions. If you’re prone to such actions, or if you find yourself tracking and trading investments too closely, stay away from this form of trading and use the internet only to check account information and gather factual information. Increasing numbers of brokers offer account information and trading capabilities via apps, which, of course, can also promote addictive investment behaviors.
Finding an acceptable advisor
Be sure to get educated before engaging the services of any financial advisor. How can you possibly evaluate the competence of someone you may hire if you yourself are financially clueless? You’ve got this book, so read it before you consider hiring someone for financial advice.
By taking the themes and major concepts of this book to heart, you greatly minimize your chances of making significant investment blunders, including hiring an incompetent or unethical advisor. You may be tempted, for example, to retain the services of an advisor who claims that their firm can predict the future economic environment and position your portfolio to take advantage. But you find in reading this book that financial advisors don’t have crystal balls and that you should steer clear of folks who purport to be able to jump into and out of investments based upon their forecasts.
Finding a competent and objective financial advisor isn’t easy. Historically, most financial consultants work on commission, and the promise of that commission can cloud their judgment. Among the minority of fee-based advisors, almost all manage money, which creates other conflicts of interest. The more money you give them to invest and manage, the more money these advisors make. That’s why you should seek financial (and tax) advice from advisors who sell their time (on an hourly basis) and don’t sell anything else.
Because investment decisions are a critical part of financial planning, take note of the fact that the most common designations of educational training among professional money managers are MBA (master of business administration) and CFA (chartered financial analyst). Financial planners often have the CFP (certified financial planner) credential, and some tax advisors who work on an hourly basis have the PFS (personal financial specialist) credential.
Advisors who provide investment advice and oversee at least $100 million must register with the U.S. Securities and Exchange Commission (SEC); otherwise, they generally register with the state that they make their principal place of business. All advisors must file Form ADV, otherwise known as the Uniform Application for Investment Adviser Registration. This lengthy document asks investment advisors to provide in a uniform format such details as a breakdown of where their income comes from, their education and employment history, the types of securities the advisory firm recommends, and the advisor’s fee schedule.
You can ask the advisor to send you a copy of his Form ADV. You can also find out whether the advisor is registered and whether he has a track record of problems by calling the SEC at 800-732-0330 or by visiting its website at www.adviserinfo.sec.gov. Many states require the registration of financial advisors, so you should also contact the department that oversees advisors in your state. Visit the North American Securities Administrators Association’s website (www.nasaa.org), and click the Contact Your Regulator link on the home page.
Chapter 2
Weighing Risks and Returns
IN THIS CHAPTER
Surveying different types of risks
Figuring out expected returns for different investments
Determining how much you need your investments to return
A woman passes up eating a hamburger at a picnic because she heard that she could contract a deadly E. coli infection from eating improperly cooked meat. The next week, that same woman hops in the passenger seat of her friend’s old-model car that lacks airbags.
Risk is in the eye of the beholder. Many people base their perception of risk, in large part, on their experiences and what they’ve been exposed to. In doing so, they often fret about relatively small risks while overlooking much larger risks.
Sure, a risk of an E. coli infection from eating poorly cooked meat exists, so the woman who was leery of eating the hamburger at the picnic had a legitimate concern. However, that same woman got into her friend’s car without an airbag and placed herself at far greater risk of dying in that situation than if she had eaten the hamburger. In the United States, more than 35,000 people typically die in automobile accidents each year.
In the world of investing, most folks worry about certain risks — some of which may make sense and some of which may not — but at the same time, they completely overlook or disregard other, more significant risks. This chapter discusses a range of investments and their risks and expected returns.
Evaluating Risks
Everywhere you turn, risks exist; some are just more apparent than others. Many people misunderstand risks. With increased knowledge, you may be able to reduce or conquer some of your fears and make more sensible decisions about reducing risks. For example, some people who fear flying don’t understand that statistically, flying is much safer than driving a car. You’re approximately 110 times more likely to die in a motor vehicle than in an airplane. But when a plane goes down, it’s big news because dozens and sometimes hundreds of people, who weren’t engaging in reckless behavior, perish. Meanwhile, the national media seem to pay less attention to the 100 people, on average, who die on the road every day.
Then there’s the issue of control. Flying seems more dangerous to some folks because the pilots are in control of the plane, whereas in your car, you can at least be at the steering wheel. Of course, you can’t control what happens around you or mechanical problems with the mode of transportation you’re using.
This doesn’t mean that you shouldn’t drive or fly or that you shouldn’t drive to the airport. However, you may consider steps you can take to reduce the significant risks you expose yourself to in a car. For example, you can get a car with more safety features, and you can choose to drive less aggressively and to minimize riding as a passenger with poor drivers.
Although some people like to live life to its fullest and take “fun” risks (how else can you explain mountain climbers, parachutists, and bungee jumpers?), most people seek to minimize risk and maximize enjoyment in their lives. The vast majority of people also understand that they’d be a lot less happy living a life in which they sought to eliminate all risks, and they likely wouldn’t be able to do so anyway.
Likewise, if you attempt to avoid all the risks involved in investing, you likely won’t succeed, and you likely won’t be happy with your investment results and lifestyle. In the investment world, some people don’t go near stocks or any investment that they perceive to be volatile. As a result, such investors often end up with lousy long-term returns and expose themselves to some high risks that they overlooked, such as the risk of having inflation and taxes erode the purchasing power of their money.
You can’t live without taking risks. Risk-free activities or ways of living simply don’t exist. You can minimize but never eliminate all risks. Some methods of risk reduction aren’t palatable because they reduce your quality of life. Risks are also composed of several factors. The sections that follow discuss the various types of investment risks and go over proven methods you can use to sensibly reduce these risks while not missing out on the upside that growth investments offer.
Market-value risk
Although the stock market can help you build wealth, most people recognize that it can also drop substantially — by 10, 20, or 30 percent (or more) in a relatively short period of time. That’s an example of market-value risk — that is, the risk that the value of an investment can decline.
Check out these historic stock market drops:
2020:
After hitting a new all-time high in February 2020, the U.S. stock market got clobbered by COVID-19–related concerns and containment measures that impeded people’s travel and other activities and ended up leading to a sharp, short-term recession. In a little over one month, from peak to bottom, the Dow Jones Industrial Average plunged 36 percent.
2008:
After a multi-year rebound, stocks peaked in 2007, and then dropped sharply during the “financial crisis” of 2008. From peak to bottom, U.S. and global stocks dropped by 50-plus percent.
2002:
After peaking in 2000, U.S. stocks, as measured by the large-company S&P 500 index, dropped about 50 percent by 2002. Stocks on the Nasdaq, which is heavily weighted toward technology stocks, plunged more than 76 percent from 2000 through 2002!
1998:
In a mere six weeks (from mid-July 1998 to early September 1998), large-company U.S. stocks fell about 20 percent. An index of smaller-company U.S. stocks dropped 33 percent over a slightly longer period of two and a half months.
1987:
The U.S. stock market plunged 36 percent in a matter of weeks. On October 19, 1987, now known as Black Monday, the Dow Jones fell 508 points, the largest percentage drop in one day at that time.
If you think that the U.S. stock market crash that occurred in the fall of 1987 was a big one, take a look at Table 2-1, which lists major declines over the past 100-plus years that were all as bad as or worse than the 1987 crash.
Real estate exhibits similar unruly, annoying tendencies. Although real estate (like stocks) has been a terrific long-term investment, various real estate markets get clobbered from time to time.
TABLE 2-1 Largest U.S. Stock Market Declines*
Period
Size of Fall
1929–1932
89% (ouch!)
2007–2009
55%
1937–1942
52%
1906–1907
49%
1890–1896
47%
1919–1921
47%
1901–1903
46%
1973–1974
45%
1916–1917
40%
2000–2002
39%
2020
36%
*
