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Investing for Beginners

Investing in Real Estate

Real estate investing comes down to either developing something and selling it for a profit or owning something and letting others use it in exchange for rent or lease payment.

It can allow someone without a lot of net worth to rapidly accumulate resources, controlling a far larger asset base than he or she could otherwise afford.

Real estate can also be traded like a stock. Usually, this happens through a corporation that qualifies as a real estate investment trust or REIT.

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IDEA EXTRACTED FROM:

Investing for Beginners

https://www.thebalance.com/investing-for-beginners-4074004

thebalance.com

10

Key Ideas

Investing defined

Investing is about laying out cash or assets now, in the hope of more cash or assets returning to you tomorrow, or next year, or next decade.

Most of the time, this is best achieved through the acquisition of productive assets.

Productive assets explained

  • Productive assets are investments that internally throw off surplus money from some sort of activity. 
  • Each type of productive asset has its own pros and cons, unique quirks, legal traditions, tax rules, and other relevant details.
  • The three most common kinds of investments from productive assets are stocks, bonds, and real estate.

Investing in Stocks

  • It means investing in common stock, which is another way to describe business ownership or business equity.
  • When you own equity (the value of the shares issued by a company) in a business, you are entitled to a share of the profit or losses generated by that company's operating activity.
  • Equities are the most rewarding asset class for investors seeking to build wealth over time without using large amounts of leverage.

Types of business equity investments

  1. Investing in Privately Held Businesses: These are businesses that have no public market for their shares. They can be a high-risk, high-reward proposition for the entrepreneur.
  2. Investing in Publicly Traded Businesses: Private businesses sometimes sell part of themselves to outside investors, in a process known as an Initial Public Offering, or IPO. When this happens, anyone can buy shares and become an owner.

Publicly traded stocks

If you are the type of person that likes companies that are stable and gush cash flow for owners, you might be drawn to 

  • blue-chip stocks,
  • dividend investing,
  • dividend growth investing,
  • value investing.

If you prefer a more aggressive portfolio allocation methodology, you might be drawn to investing in the stock of bad companies.  
Even a small increase in profitability could lead to a disproportionately large jump in the market price of the stock.

Investing in Fixed-Income Securities (Bonds)

  • When you buy fixed income security, you are really lending money to the bond issuer in exchange for interest income.
  • You can buy certificates of deposit or money markets, or invest in corporate bonds, tax-free municipal bonds, and U.S. savings bonds.
  • They are purchased through a brokerage account. 
  • Selecting your broker will require you to choose between either a discount or a full-service model. 
  • You can work with a registered investment advisor or asset management company that operates on a fiduciary basis.

Investing in Real Estate

Real estate investing comes down to either developing something and selling it for a profit or owning something and letting others use it in exchange for rent or lease payment.

It can allow someone without a lot of net worth to rapidly accumulate resources, controlling a far larger asset base than he or she could otherwise afford.

Real estate can also be traded like a stock. Usually, this happens through a corporation that qualifies as a real estate investment trust or REIT.

Owning Assets

Once you've settled on the asset class you want to own, your next step is to decide how you are going to own it.

If you decide you want a stake in a publicly-traded business, do you want to own the shares outright, or through a pooled structure?

Outright vs Pooled Ownership

Outright Ownership: You will buy shares of individual companies directly. To do this right requires a certain level of knowledge.

Pooled Ownership:  You mix your money with other people and buy ownership in a number of companies through a shared structure or entity. The downside is a near-total loss of control.

Decide Where You Want to Hold Those Assets

Your decision can have a major impact on how your investments are taxed.

Choices include taxable brokerage accounts, Traditional IRAs, Roth IRAs, Simple IRAs, SEP-IRA, and maybe even family limited partnerships.

SIMILAR ARTICLES & IDEAS:

Common investment questions
Common investment questions

Two of the most common investment questions are "what do you invest in " and "what are the best investing strategies"?

The best investing strategies are...

Shady investment advice

Bad investing advice can come from many quarters, such as wealth expos or financial advisors. If anyone promises you any type of return over 12%, 99% of the time, they are probably playing you.

There are great financial advisors out there, but many people who sell investment products just want your money. However, it's not that hard to invest for yourself.

How to avoid bad investment advice
  1. Never buy a financial or investing product from someone you just met.
  2. Getting returns over 12% per year is ridiculously hard. If it sounds too good to be true, it is.
  3. If you don't understand it, don't invest in it.
  4. If one of your friends recommends an investment that's making them a lot of money, they are probably suckers too. If you see the "results not typical" on any marketing materials, move on.
  5. There are no "secrets of the super-wealthy" that anyone will sell you for $500 or that you can take advantage of unless you have hundreds of thousands of dollars.

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Investing

... is the trading of your money today for a lot more money in the future. It is a high yield over the long term.

What happens to your money

Banks don’t like to give away their money. That mindset is reflected in the interest rates of checking and savings accounts of 0,5% and 0.9% avg. annual interest respectively.

When you deposit your money in the bank, the bank turns around and invests that money at 7% a year or more. After they collect their profit, they give a tiny shaving of it to you.

Portfolio and Diversification
  • Your portfolio reflects your long-term wealth building investment strategy – not the short term. It includes everything you own. Your retirement accounts, your investment accounts, even your home are types of investments.
  • Diversification is a way to describe owning multiple types of investment assets. Diversification is smart because you both protect yourself from failure and position yourself to take advantage of multiple robust methods for building wealth.

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6 ideal investments for beginners
6 ideal investments for beginners
  1. If you have a 401(k) or another retirement plan at work, it’s very likely the first place you should put your money— especially if your company matches a portion of your contributions.
Financial planning

 ...is the process which provides you a framework for achieving your life goals in a systematic and planned way by avoiding shocks and surprises.

Try making a budget
  • Create a full inventory of expenses in front of you: Categorize them into fixed and variable; urgent and non-urgent; necessities and luxury; avoidable and unavoidable.
  • You can create a hierarchy of needs and decide which one’s to address first. It’s all about prioritizing. 
  • Accept that you have limited resources and unlimited wants. But you have to manage your resources. The sooner you accept this fact, the better you can control your impulses towards avoidable expenditures.
Maintain a personal balance sheet

It’s a statement wherein you can jot down your assets and liabilities.

  • Pull together your bank statements and other proofs of the liabilities
  • List down your assets like the bank balance, all investments, home value, and value of other assets.
  • Take a sum of all the assets to arrive at the total value of your assets.
  • List down your liabilities the (car loan, home loan, credit card balances etc.)
  • The sum of all the liabilities will show the value of the money you owe.
  • When you subtract the value of liabilities from assets, you get your Net Worth.

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Investing In Each Other

A strong, healthy, and long-lasting marriage has some key ingredients that make it work: Commitment, Hard Work, Consistency, and Intentionality.

The same ingredients are required for buildin...

Talk About It

Many times, partners do not see eye to eye, have different preferences or moods. Money is the No.1 issue that couples argue about, according to studies.

It is crucial to discuss financial goals and retirement plans with one's spouse, figuring out a strategy in advance, to avoid any confrontation later.

Saving up For Retirement, Together
  • Firstly, save up for the emergency fund, which is three to six months of expenses, and set it aside. After that, least 15% of your combined gross household income should go towards your retirement, once all debt is cleared.
  • If only one of the partner works, you still can save up for retirement using a Spousal IRA, provided a joint tax return is filed. For details, you can consult an investing professional.
  • It is also a good idea to clear up the old 401(k) accounts which are hanging around from the old jobs and put one's investments in order.

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Your net worth
Your net worth

Your net worth is the total value of all your assets, minus all of your liabilities.

It is important to know your net worth so you can calculate how much progress y...

How to calculate net worth
  1. Add up the total valued of your cash and other assets. Items could be cash, stocks, bonds, DCs, 401(k), real estate, the money you're owed. Your goal is to determine how much these assets would be worth if you were to convert them into cash.
  2. Then subtract all your outstanding liabilities, such as credit card balances, student loans, mortgage(s), medical debt, car loans, private loans, payments remaining on a home or car lease.
Why you should know your net worth
  • Knowing your net worth provides you with an actual state of your finances.
  • It can also tell you how close you are to achieving financial independence.
  • Tracking over time helps you know if you're spending too much month after month.
  • When opening a bank or brokerage account, your net worth will be considered. Knowing up front can help you see whether you're eligible for certain investments.
Investment explained
Investment explained

An investment is a gamble: instead of the security of guaranteed returns, you're taking a risk with your money. 

You can invest in Shares, Bonds, Funds, Government bonds (gilts), ...

How stock markets work
  • A stock market is simply a place where buyers and sellers meet to sell shares.
  • A share is a divided-up unit of the value of a company.
  • Shares exist to boost profits of firms to turn a business into a financial success.
  • Enter a stock market: in return for your cash, a business offers you a share in its future – so you essentially own a tiny slice of that company and become a 'shareholder'.
  • This slice of the company you own can then be traded with anyone who wants to buy it.
Share price of a company can rise and fall
  • The price is initially set by the firm offering shares.
  • Its price on any given day can be determined by poor financial results, the economic health and so-called 'sentiment', ie, if City buyers think a firm will struggle, its price can fall. 
  • Shares are listed on an 'index'.

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Warren Buffett

"Do not save what is left after spending; instead spend what is left after saving."

Warren Buffett
From consumer to investor

A consumer spends money and follows trends while an investor puts capital to work and takes advantage of trends.

Chronic consumers often go broke, and persistent investors often get rich.

Discover if you’re a consumer
  • You feel the need to reward yourself after a hard day of work by buying new clothes/accessories or eating out.
  • Lifestyle creep controls your expenses. When your income increases, you buy a new car or a more expensive house.
  • You reserve your credit card for unexpected expenses instead of using an emergency fund.
  • You rationalize using a credit card to buy things you might not purchase with a debit card.
  • When something is on sale, you feel the urge to buy it, even if you wouldn't have otherwise bought it.
  • You follow social trends.
  • You don't think you have money to invest or the time for it.

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Smart retirement planning boils down to a few simple truths.
  • Time is on your side.  The earlier you start saving money, the more time you give compounding to work for you. 
  • Take risks when you're young.  Althoug...
Net Worth = Assets - Liabilities

Your net worth gives an overview of your financial situation at this point. It is the difference between what you own and what you owe.

Your net worth is positive if your assets exceed...

Calculating your assets and liabilities

Assets are anything of value that you own that can be converted into cash. Examples include:

  • Investments
  • Bank and brokerage accounts
  • Retirement funds
  • Real estate
  • Personal property: vehicles, jewellery and collectables.
  • Cash

Your liabilities represent your debts, such as loans, mortgages, credit card debt, medical bills and student loans.

Find your ideal

Determine your target net worth - where you want to be in the near-term and long-term future.

The following formula is helpful:

Target Net Worth=[Your Age−25]∗[1/5∗Gross Annual Income]

A 50-year-old with a gross annual income of $75,000 might aim for a net worth of $375,000 ([50 - 25 = 25] x [$75,000 ÷ 5 = $15,000])
Your net worth can be much more or much less than the amount indicated by the guideline.

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