00:00:01 TONYA: This class is for education, and we won’t talk about specific investments or specific situations because every situation is different. Plus, this class is for a wide variety of potential new investors.
00:00:11 [music]
00:00:20 TONYA: Hello, and welcome to another exciting, informative financial wellness session. Let’s get started. I’m Tonya Rapley. Welcome to a new series from State Farm and Let’s Start Today. This is where you’ll find the tools, support and education you need to take control of your finances today and reach your goals for tomorrow.
These helpful courses are inspired by an ever-evolving learning lab known as Next Door State Farm. And speaking of “Next Door”, I’m here today with Dan, who is a financial coach at Next Door State Farm, and Earl who is a State Farm Agent. Thank you, guys, for joining me.
00:00:54 DAN: Thank you, Tonya.
00:00:55 EARL: Thanks for having me.
00:00:56 TONYA: Thank you. So today’s session is called “Just the Facts: Investing.” Are you guys ready to talk about some eye-opening stuff?
00:01:04 EARL: Absolutely. We’re ready to go.
00:01:06 DAN: Let’s do it.
00:01:06 TONYA: Okay. So before we dig in, I wanted to go over what we’re gonna discuss. And today we’ll be discussing: determining if you’re ready to begin investing, why it’s important to start early, establishing risk vs. reward, identifying your time horizon and how that factors into your investment strategy, then the common investments you should consider, the diversification of your portfolio and building that portfolio. You guys ready to dig in?
00:01:33 EARL: Yes, we are.
00:01:34 DAN: We got a lot to do.
00:01:35 TONYA: Alright. So, let’s start with that question that everybody has: When am I ready to start investing? And am I ready to begin investing?
00:01:41 DAN: I think it’s a great question. When I run into it, there’s a lot of kind of fear around investing. And I understand that. And so we’ll kind of talk through some of that stuff. There’s also the “Am I ready to start investing?” And I think the big two things for me about whether you’re ready to start investing is: having that emergency fund and having your debt managed. It doesn’t necessarily mean having all of your debt paid off, but it means having it managed.
00:02:05 TONYA: Absolutely. Absolutely.
00:02:07 EARL: So, you’re not necessarily talking about all your debt and you’re not necessarily talking about paying it all off. You just want to get to a point where you can pay off the unproductive part, or the counterproductive parts of your debt like your high credit card debt and things like that. And then just manage the rest of it within your budget, I think you’ll be okay.
00:02:26 TONYA: Absolutely.
00:02:27 DAN: I think “unproductive” is a good word for it, where it’s things that are really high-interest like credit cards, maybe private loans or collections, things like that, where you honestly may be paying more in interest than you would earn on an investment anyway.
00:02:40 TONYA: Yeah. It’s counterproductive.
00:02:41 DAN: So get that paid off. If you have things like a mortgage or a student loan, I think that’s okay. You gotta be making your payments.
00:02:49 EARL: You gotta be making those payments all along, but you want to get really down to the point where you are getting your financial house in order. You’re getting rid of the debt and getting rid of some spending habits and things like that. And when you get to that point, you can really focus on what you’re trying to do from an investment standpoint. And it actually gives you a better chance of having success.
00:03:11 TONYA: Absolutely. And I say make sure you’re up-to-date on all of your finances as well. Your investment portfolio is not there to save you now. It’s there to help you down the line. And I think some people make the mistake of saying, “Okay, well, while I don’t have my entire financial house together, I’ve started investing and that’s good enough.” And no, it’s not good enough because you want to make sure you’re making the right decisions today and tomorrow.
00:03:31 DAN: Well that’s why I think the emergency fund’s so important. A lot of people think, “Hey. Maybe I have my debt in order. I’ll start investing.” Well what happens if an emergency comes up, right? What if we have to go back into that unproductive debt or what if we need to sell our investments at an inopportune time because of that emergency that happened? So I think part of that house in order is having that kind of fund set aside for, “Oh no, the wheels fell off my car, but I can handle that.”
00:03:56 EARL: Right. I get this question all the time about how much do I need in terms of emergency funds. Well, you know, that’s kind of up to you, but a rule of thumb would be six to nine months of essential emergency funds so that you can stay alive, so to speak, in terms of until you can get your house back in order, so I would say six to nine months of essential emergency funds to be able to meet your requirements there.
00:04:22 TONYA: Yeah. So, it looks like your investments are an important part of your financial puzzle, per say, but you want to make sure that you have all the pieces fitting together. And some of those pieces need to be put together before you begin investing. So if you’re trying to decide if you’re ready to begin investing, look at the other components of your financial puzzle to make sure you have those.
00:04:40 EARL: Yeah. It makes absolutely no sense to start investing before you have your house in order.
00:04:47 TONYA: Exactly
00:04:48 EARL: It just doesn’t because it’s not leading to your best efforts in terms of making an investing decision or commitment.
00:04:54 TONYA: Exactly. So, investments are important, but you want to make sure you have your bases covered before you start investing. Okay, So I think we have a better understanding of whether or not we’re ready to begin investing. Let’s have a look at what we’ve learned.
00:05:05
(Music / Chapter 1 Ends with Key Takeaways slide)
(Chapter 2 Begins)
00:05:26 TONYA: Alright, so moving into why it’s important to start now or to start as soon as you have your financial house in order. What are the benefits of starting early, or starting now we should say?
00:05:38 DAN: I mean this is gonna sound silly, buy you’ve started.
00:05:41 TONYA: Yeah. That’s the hardest part a lot of times.
00:05:45 DAN: There’s a lot of fear around this and there’s a lot of, “I’ll wait until I…” or, “I’ll build up a little bit…”, or, “I’ll do this”, or, “I’ll do that”. So we’re gonna talk a lot, I think, about compound interest, which is this idea that investments make interest. Then there’s interest on the old interest.
00:05:59 TONYA: Yeah. Let’s go ahead and start that now. Let’s go ahead and dig into compound interest.
]00:06:02 DAN: Sure. Yeah. So, compound interest is really just interest on old interest. So, let’s say in a hypothetical example you put away $1,000 and you get 10%, you’re gonna get $100 in growth. That next time you put get 10%, you’re gonna get $110. You get the same hundred and then 10 on the old hundred. Then you’ll get $121. And so as that goes on, year after year after year it really starts to add up, which is why you want to start.
00:06:28 EARL: Yeah, I think it was Albert Einstein who said that compound interest is the eight wonder of the world. And he or she who owns that, earns it, earns this interest. And he or she who doesn’t know it, they end up paying it. So, you end up like Dan said, with this compound top of your money, and you end up being far, far ahead in terms of what your investments are gonna produce. So this compound interest is very, very important in terms of people learning it.
But I think one of the things that causes people not to get started is because they think they gotta know everything. It’s one of the hardest hurdles to achieve in terms of just getting started. So one of the best ways to do that is just to maybe work with likeminded people who wanna invest and have the same interests. And another way, maybe, is to bring somebody in who is gonna help you, and you can share your ideals with. Just any way you can to get started and get over that major hurdle of just getting started.
00:07:33 TONYA: Yeah. Oftentimes when I’m working with people or I’m talking to them, I say “You know, you’re spending your money in other ways, and the money isn’t working for you. So, you’re fearful of investing, but you’re not giving your money a chance to work for you. So why not go ahead and take that chance?
00:07:46 DAN: I’m a big proponent of I think it’s more the fear than it is necessarily amount of money. Start with a few dollars, something that you’re okay, “Hey, it was either buying lunch out or it was using it for this.” Start with ten dollars. That’s okay. Get comfortable with it. Realize that, yeah, there’s ups, downs, there’s things you need to learn, but you don’t have to have every single piece of knowledge to really get moving.
00:08:08 EARL: Right, right, and it’s important that, just like you said, you don’t have to start with a lot of money. You don’t have to start with a lot of education. Just start. Just learn one little thing, and maybe that will allow you to learn another. So, it’s just important to pick up your foot, take a step, take another step, and before long you’re walking and running and stuff like that. So just get involved.
00:08:30 DAN: The thing I also loved, I just wanna go back a second. I love that Albert Einstein quote because it ties in so perfectly to the last chapter “He Who Understands It, Earns It; He Who Doesn’t, Pays It.” Well, guess what, that’s credit card debt.
00:08:43 EARL: You don’t wanna be the one who’s paying it.
00:08:45 DAN: Right. But that’s credit card debt, right? That’s why we talked about getting that handled ahead of time.
00:08:48 TONYA: Getting rid of it, yeah. Because then you’re paying credit card debt, but you’re earning interest, but you’re really paying credit card debt.
00:08:52 EARL: Right, and that’s why I go back to education. Because if people knew that, everybody would want to be earning more and doing a better job and doing it way efficiently. So it gets back to education, and that Albert Einstein quote is probably an eighth or ninth wonder of the world, too, in just realizing that.
00:09:11 TONYA: So, I think that we could say basically that it’s important to start now because when you start investing your money it gives you the opportunity to make more money on your money.
00:09:19 DAN: Absolutely.
00:09:20 TONYA: So now we know that you want to start investing now, but there are also benefits to starting early. So someone who starts early has an advantage. What are some of the advantages of starting early when it comes to investing?
00:09:31 DAN: It kind of goes back to that compound interest, right? And that’s powerful. But really it is more powerful the longer you have, which is not to say, “Hey, if you’re in a situation, you’re a little older, you’re starting a little later.” That’s okay, but it’s back to the starting as soon as you can, whether that’s now when you’re 52, whether that’s now when you’re 22, whether that’s now when you’re 82.
The sooner you can start, the more years that has to compound, the faster, the stronger, the quicker that’s gonna grow. And, you know, as scary as this can be, most people who are pretty young right now should have over $1,000,000 when they retire. And that seems impossible until you start to look at compound interest and you realize that’s really not that much when it comes to saving now. But if you’re trying to do that at 60, it’s gonna be quite a bit harder. It’s doable, but it’s harder.
00:10:23 TONYA: Yeah. You know, Dan and Earl, I’ve never sat and said, “You know, I wish I would have bought those shoes when I was 20.” I never have said that, but I have said, “I wish I would have started investing when I was 20,” especially knowing what I know now.
00:10:35 EARL: Yeah, because the younger you are, the more you can achieve. And the more of the ups and the downs that you can handle because if you start right. And Dan couldn’t be more right or more correct in terms of getting back to this compound interest about Albert Einstein. But the ups and the downs and the longevity of starting early will allow you to defeat a lot of the things that’s gonna happen to you, so it’s important that they start early.
00:11:06 TONYA: Absolutely. Yeah. So starting early, that’s one of the most important factors. And even if you haven’t started early, maybe you can encourage someone else in your life to start early because it really is important in allowing your money to work for you and take advantage of compound interest.
00:11:19 DAN: Well, and now is earlier than later, right? So whether you don’t feel like you’re starting, well you know, that’s what I’m saying. Even if you don’t feel like you’re early, if you feel like you’re late, it’s still earlier now than it would be a year from now, two years from now, five years from now.
00:11:34 TONYA: I like that philosophy.
00:11:36 EARL: Yeah, I do, too. I’m still thinking about that.
00:11:37 TONYA: I like that. I’m adopting that. Now is earlier than later.
00:11:39 EARL: Now is earlier than later.
00:11:40 TONYA: So we can all agree that starting early is essential to growing your investment portfolio.
00:11:43 EARL: Yes.
00:11:44 TONYA: Let’s have a look at what we’ve learned.
00:11:46
(Music / Chapter 2 Ends with Key Takeaways slide)
(Chapter 3 Begins)
00:12:04 TONYA: So we kind of touch on risk in that last section, but let’s really get into risk versus reward because that’s what makes it all possible, right? You’re taking a risk, you earn a reward. So let me hear your opinions on helping customers analyze the risk versus the reward when it comes to their investment strategy.
00:12:24 EARL: There’s a lotta tools that will help people learn how to take the risk or be more comfortable with taking a risk, but most customers, they just focus on the risk part. They can only see themselves losing. And you may have experienced that, too.
00:12:42 TONYA: Yeah, it’s because I think we hear it a lot in the news. There’s always, “The DOW did this.” We’re always talking about what happened, what people lost instead of the rewards. We don’t really talk about the success stories of people who were invested in the market.
00:12:54 EARL: Yeah.
00:12:55 DAN: Well, I also wanna step back and make sure people understand because I don’t know that everybody knows this, that risk and reward also move together, right? You can take a lot of risk, and with that comes more rewards. If you’re not comfortable with that, you can take less risk, but with it will come a little bit less reward. They’re just gonna move together, right? If there was something very high-return that was very low-risk, we wouldn’t be here. We’d be on our island paradise somewhere, right?
00:13:21 EARL: Right. Right.
00:13:22 DAN: But I think the risk is highly publicized, but people don’t really think about it over the long term.
]00:13:29 TONYA: And I think that’s what scares people. When we think about fear, when it comes to investing, it’s the risk. Because people aren’t afraid of making more money. They’re afraid of losing money and making the wrong decisions.
00:13:38 EARL: Yeah. And I think people have to be careful in terms of understanding that yeah you got risk versus reward, but you also got risk tolerance. Now risk tolerance is a situation where you could—you know, the market—you know, what risk are you willing to take here? Because the market can go up. The market can go down. Your investments can go up. Your investments can go down. We don’t know. We don’t know what’s gonna happen, but now a person will say,
“Okay, I don’t know that I really wanna take this type of risk. What are my risk tolerance?” Well, everybody’s is different, and so you may wanna start with just looking at a simple thing like balancing your risk again a reward. Don’t be too far out here. Just like Dan said, if you wanna be out here and get this great reward, then you got to take more risk. Well, you may not be comfortable with that. Your risk tolerance may not allow you to reach out that far.
00:14:36 TONYA: Absolutely.
00:14:37 EARL: But just balance it until you feel more comfortable in terms of what you can do.
00:14:41 TONYA: Absolutely. And, Dan, I think, you know, you probably work with people in helping them identify their different risk profiles, right, when you’re working with clients?
00:14:47 DAN: Yeah. Absolutely. Everybody’s gonna have a little bit of a different feeling about risk. So we kind of break it into three. There’s conservative, which is, “Hey, I’m really—I don’t like to see the ups and downs. I’m okay”, kind of that slow and steady, “I don’t wanna take a lot of risk, but that’s okay if I don’t get quite as much return”. And then on the other side there’s the aggressive, right? “I am okay with big up and down as long as I kinda go in as fast as I can where I wanna go.”
00:15:14 TONYA: Yeah.
00:15:14 DAN: And then obviously there’s kind of a moderate, which a little blend of those two. “I wanna see some return. I wanna see some growth, but I know it is gonna come with some ups and downs as we go.” And obviously those are three, but it’s a spectrum, right? Some people are gonna fall somewhere between the first two, the second two, it’s gonna be where do you fit in kinda those three in general.
00:15:36 TONYA: And we’re gonna dig into portfolio, but you can adjust that over time.
00:15:38 EARL: Yes.
00:15:39 DAN: 100%.
00:15:40 TONYA: Just because you’re aggressive right now doesn’t mean you have to remain aggressive the duration of your investment history.
00:15:44 DAN: 100%.
00:15:45 EARL: Right, and the time horizon is the time you have to invest is going to dictate a lot of that, but what you don’t want to find yourself doing is having to be aggressive because now you waited, you waited, you waited, and you haven’t done what you needed to do, and you’re trying to get it all at one time. That’s a very bad situation to be in. So you wanna be really careful with how you’re choosing that. You can lean a little bit towards the middle, or lean a little bit towards the aggressive, but just wanna be really careful that you’re not too far out there.
00:16:20 TONYA: We all have different personalities. We all have different risk tolerances, and it’s important to identify which one works out best for you in your situation. Let’s have a look at what we’ve learned.
00:16:29
(Music / Chapter 3 Ends with Key Takeaways slide)
(Chapter 4 Begins)
00:16:47 TONYA: So we’ve touched on time horizons. I’ve heard that word a few times, but let’s dig into what someone’s time horizon is, and how that applies to their investment strategy.
00:16:59 DAN: Yeah, so your time horizon is really: when do you need the money? Right? If you need the money in three years, your time horizon is three years. If you need it in ten years, it’s in ten years. If you need it in 30 years, in 30 years. And this really comes down to we talked a lot about risk tolerance. I we covered that well on that’s how you feel about risk. How much risk can you take, right? If you need your money-.
00:17:19 EARL: Within this window.
00:17:20 DAN: If you need your money in two years, even if you’re really aggressive, you maybe shouldn’t be that aggressive. If you need it in 30 years, even if you feel conservative, you can probably weather a few more ups and downs like Earl mentioned.
00:17:30 EARL: Yeah. If you’re in your 20s, you can do a whole lot more in terms of risk. But if you’re, just like Dan was saying, in that time capacity, if you’re in your late 50s, early 60s and you wanna retire at 65, that’s not a big window that you have to compress everything into. You’ve got a lot to think about in that window. So this time horizon is really, just like he said, the capacity to get what you want to do inside of that window. And it’s really important that you understand what that is so that you can have an opportunity to make the right types of decisions inside that time horizon.
00:18:12 TONYA: Yeah. When we say, “time horizon”, I can’t help but think about, you know, we’re on this long stretch of road and we’re looking at the sunset, and we’re driving to it in a convertible. And it’s like, how much road do you have until you reach your sunset?
00:18:24 DAN: I agree, but I think sometimes people start thinking about this always with age, right? You’re about to retire, you’re about to—it’s not-.
00:18:31 EARL: I’m not, though.
00:18:32 DAN: Well, it’s not just age though, right? It’s length of time until your goal. So, if you have a kid who’s one year old, and your starting to save for their college, you can take a lot of ups and downs in hopes that their college fund grows.
00:18:45 TONYA: Yeah.
00:18:46 DAN: If your kid is one year away from college, and you’ve got it really aggressively invested and something happens, a pretty awkward conversation to talk to them about having a gap year so your investments can grow again.
00:18:58 TONYA: And so, Dan, I like how you said it applies to a variety of situations. It’s not just about retirement. It's about those financial goals that are important to you. But also as Earl said, sometimes you have to get creative along the way and it’s not just about having those investments. Like, “Okay, what else are we going to do to supplement this time that we might have lost because we did not start early?”
00:19:17 EARL: Right.
00:19:18 DAN: Right. And again, that’s for everything.
00:19:19 EARL: Yeah.
00:19:20 DAN: There’s retirement, there’s kids sending to college down payment. If you’re ten years away, maybe investing. If you’re two years ago, maybe not. So there’s a lot of pieces there. And I think the action item here is: sit down, list out your goals, and then kind of make a little bit of a matrix. How long do I have? How much risk am I comfortable with? And where do those two things intercept?
00:19:41 TONYA: Where do they meet? Yeah. Time horizon is important, and I’m glad that we have a better understanding of how that factors into our investment strategy. Let’s have a look at what we’ve learned.
00:19:49
(Music / Chapter 4 Ends with Key Takeaways slide)
(Chapter 5 Begins)
00:20:26 TONYA: Alright, so moving on: common investments. We’ve spoken about starting now, starting early, identifying your time capacity, your time horizon, now what are we going to invest in? What are the common investments that people should be looking into?
00:20:40 EARL: Well, you know, there are different asset classes. You got cash and you got cash equivalents. These would be like your savings accounts and bank accounts and money markets, different types of things like that. You got bonds. You wanna think of bonds like you think of a loan. And you got equities or better known as stocks or stocks better known as equities. And so all of these are going to be different asset classes that you can invest in.
00:21:11 TONYA: So we have stocks and we have bonds. Can you just explain simply what those are?
00:21:16 DAN: Absolutely. So think of a bond like a loan. Right? You take in loans like I get my mortgage and I maybe get my car loan. It’s just the opposite. You’re loaning out money to a company, or a government or maybe a city, and they’re paying you back, generally, a fixed amount, a fixed interest rate. So these are often called “fixed income” because of that.
00:21:39 TONYA: Okay.
00:21:40 DAN: And then at the end of the bond, they’ll return the money you originally lent them with that final interest payment. Stocks are ownership in a company. So that’s why they’re also called “equity” just like ownership in your house is called your “equity”, ownership in a company is called “equity”. So you own a very, very small percent of a company. You can kinda make money two ways here. One, the company can be worth more.
And if so, your stock may go up in value. Or they can pay you what’s called a “dividend.” So, small company like a pizza shop, they are trying to make money and pay their drivers and order new ingredients, and market. In the end, if they have money left over, the owner uses that to pay their bills. Big companies are no different. A big company makes 30 billion dollars, and they take 20 billion of it to market and come up with a recipe and build a new plant, and there’s some money left over.
At the end they will give it to their owners, which are stockholders. So you’ll get a dividend. A couple of cents, maybe a dollar, who knows? But they’ll pay you some back.
00:22:41 TONYA: I think that’s a great example.
00:22:42 EARL: Yes, and of course stock are, just like Dan said, they’re on the other end of that, and again we’re back to time horizon again because what you’re trying to do depends on the asset class you might invest in. But if you are gonna be in bonds, you gotta—you know they come in the forms of government bonds, they come in the form of municipals, which is meaning that some municipality is doing some project, like a city or a county or something like schools.
Or you may have a corporate bond, which corporations use to buy different things, to build buildings, to do different things with that money, and so it’s important to understand that these earn interest on their money.
00:23:34 TONYA: Got you. So, Dan, I have a question for you.
00:23:35 DAN: Yeah, please.
00:23:36 TONYA: If someone walks into your office, they say, “You know, my coworker was talking to me about stocks and bonds. Which one should I look into?
00:23:42 DAN: I think Earl’s totally right. What’s you risk tolerance? What’s your time horizon? What do you need? And to be honest with you, the thing that I just love that he mentioned is there’s also different risk profiles within these.
00:23:53 TONYA: Within, yeah.
00:23:54 DAN: Right? So, I think this is a great example and a great place to talk about why risk and return move together. Let’s say I have a very small company, right? And I want to borrow money. I offer you a bond. The chance that I go out of business is pretty high. So, if I offer you 2%, and the government’s offering you 2% and you’re much more confident the government’s gonna pay you back, you’re not gonna give me any money. So what if I say I’ll give you 6%?
Well, then what if you find out a much bigger company is giving you 6%? Again, you’re gonna be like, “I’m not gonna give you that money. I’m much more comfortable at big companies that pay me back.”
00:24:27 TONYA: Yeah.
00:24:28 DAN: Then what if I say, “Okay, I’ll give you 8%”? Then suddenly-
00:24:32 TONYA: It gets attractive.
00:24:33 DAN: Well, maybe, maybe not. That’s where your risk profile, your time horizon starts to make you think about, “Am I okay with that slow, and steady and consistent or am I willing to take this chance for more return?”
00:24:46 EARL: Yeah. And so basically what Dan is saying is the more risky his company is in terms of issuing that bond, to induce me and to entice me to take it he’s got to offer me a bigger return. Otherwise I’m not gonna take the risk.
00:25:00 TONYA: So, high-level overview: a stock is…
00:25:05 DAN: The riskiest.
]00:25:06 TONYA: Yes. And then the bonds are…
00:25:08 EARL: The bonds are in the middle, and then your cash equivalents, your savings accounts, your cash, is gonna be the safest.
00:25:14 TONYA: There are a variety of investment vehicles available to you, and it’s important to understand which one works best for you and your future goals. Let’s have a look at what we’ve learned.
00:25:22
(Music / Chapter 6 Ends with Key Takeaways slide)
(Chapter 7 Begins)
00:25:53 TONYA: Alright, so next we’re moving into diversification. We’ve hinted it at this, but let’s really dig: At the basic level what is diversification?
00:26:05 DAN: It’s not putting all of your eggs in one basket. I mean that’s as simple as it gets, right? If you have all of your money in an investment, and that investment doesn’t do well, you don’t do well. The market, kind of like using a yo-yo while walking up stairs, individual companies will do well, individual companies will do poorly, but the whole market will do better. And so, it may make sense for us to have a little bit of that whole thing.
00:26:36 EARL: Yeah. And Dan says just perfectly, “It’s not putting all of your eggs in one basket.” As a result, you’re not putting all of your money into one stock. Diversification suggests that you have multiple stocks, multiple types of stocks, or multiple, different things. So the idea is not to put all of your eggs in one basket because you know what your mama said, right? The basket could what? Tip over and break. Then all your eggs are broken. Right?
So what you want to do, the whole idea with the strategy is to put yourself in a situation where if that basket tips over, maybe it only breaks one egg, right? This stock goes down, these others stay where they are or go up. You don’t lose everything. You are diversified.
00:27:29 DAN: I think there’s actually two levels to this. So we started talking about not putting all your eggs in one basket of: don’t own one just one stock. Own multiple different stocks. And that’s maybe to your analogy of owning four different types of cars.
00:27:40 TONYA: Yeah.
00:27:41 DAN: There’s a little bit of difference. But there’s also if you want diversification maybe between different assets.
00:27:46 TONYA: Absolutely, Dan. Yes.
00:27:47 DAN: So you don’t want just stocks. Maybe you also want bonds. So, it’s not just different stocks, it’s also different types of assets.
00:27:55 EARL: Yeah.
00:27:56 TONYA: Absolutely. And diversity is important. Diversity in your investment portfolio, it can actually protect you from some of the risks that you’re concerned with.
00:28:02 EARL: Big time. That’s what it’s designed to do.
00:28:04 DAN: And I think the obvious question becomes: how do we get it?
00:28:08 TONYA: Yeah.
00:28:09 DAN: It sounds so good. We’re like, “Cool.”
00:28:11 TONYA: Yeah, I want more!
00:28:12 DAN: “We want diversification!” Now what? So I think it makes sense for us to talk a little about what’s called “mutual funds” or ETFs, right? An individual stock, not all of them, but they can cost a thousand dollars. If I have five hundred dollars to invest, how am I gonna get diversification? Right? I might only have one company, or I might only have a couple of them, but I won’t have a lot.
00:28:35 TONYA: So we don’t want to put all those eggs in one basket. We want to diversify our portfolios. Let’s have a look at what we’ve learned.
00:28:41
(Music / Chapter 7 Ends with Key Takeaways slide)
(Chapter 8 Begins)
00:29:00 TONYA: So that’s diversification. Now we’re building a portfolio, right? Because that’s what all this is, it fits into our portfolio. So actually, let’s dial it back. The basics: what is a portfolio?
00:29:12 DAN: Absolutely. An investment portfolio is just a collection of all your investments. So you might have some stocks, some bonds, some mutual funds, some ETFs. All of that together is your portfolio that you have hopefully built by looking at your risk tolerance, your time horizon, your diversification needs, all those things we talked about kind of come together in one nice pot, basically.
00:29:35 TONYA: Yeah, so it’s your investment portfolio.
00:29:36 DAN: It’s your investment portfolio. It’s all your investments together.
00:29:40 TONYA: In one place.
00:29:41 EARL: Yep. And you get these investments and get them together and low and behold things changes within your life, within some entity, whatever, and you have to constantly focus on them. You can’t just build them, and set them there] and just leave them. You gotta go and make sure that they are doing what you need, they’re helping you accomplish your goals, and they’re acting as your whole portfolio in terms of what you’re trying to do.
00:30:14 DAN: Yes. Absolutely. So, for me, building a portfolio is kind of like ordering off a menu. So you go buy some stock, you’re getting into something that’s high-risk, right? So it’s kind of like going to a menu and saying, “Hey, I want this thing.” So maybe that’s yogurt. But if you go in and say you want yogurt, they’re going to give it to you. And then you say, “I want oatmeal”, they’re gonna give it to you. And then you say, “I want buffalo wings”, and they’re gonna give it to you.
So if you kind of order a bunch of different things that don’t make sense together, they don’t know any better. You went in and asked for each thing individually. They’re just gonna give it to you, let you have that, even if it’s kind of nasty.
00:30:51 TONYA: Yeah.
00:30:52 EARL: And that is nasty, what you just said.
00:30:53 TONYA: Yeah, indigestion and everything else.
00:30:58 DAN: So, building your portfolio is going in and saying, “Hey, yogurt’s great. Oatmeal’s great. Whatever’s great. But I need to build myself a meal. I wanna get a little bit of this, a little bit of that, a little bit of this, but I’m really comfortable with what I’m getting. And to the point we made earlier, that Earl made earlier, as you age, and your goals chance, what you wanna eat is gonna chance. So you’re gonna change your portfolio to kind of match your appetite at the time.
00:31:22 TONYA: Yeah, and I love that. I love that example. You’re creating a complementary menu so that all the items complement each other.
00:31:28 EARL: Yeah, exactly. And, of course you could look at it from a pie chart standpoint, which is pie, I guess leading into what she was talking about.
00:31:37 DAN: Yeah, there you go.
00:31:38 TONYA: Not as exciting at buffalo wings and yogurt.
00:31:41 EARL: Not as, banana pudding and all that kind of stuff. You can have some of that, actually I’m preferably okay. But anyway, I’m building my portfolio. And we’re not talking about it today, but there could be some real estate in there, whatever it is that makes up my menu, what I have in terms of that I’m gonna be working from and investing from. That’s my portfolio that I built. Now I gotta manage it.
I can’t just leave it there, and let it sit, and not pay attention to it. I gotta make sure that this thing is not gonna be static. It’s gonna be dynamic. It’s always gonna be changing. There’s always changes going on so I gotta make sure that I’m paying attention to it so that I can have it do the best job that I can in reaching my goal.
00:32:28 DAN: And what I love about that pie chart analogy is that’s what you’re gonna see.
00:32:31 TONYA: Yeah.
00:32:32 DAN: Out in the world. If you go look at your retirement or some other portfolio you may have, they’re likely gonna show you a pie chart, and it’s gonna have all these pieces. And hopefully now, after talking about this, you’ll understand, “Oh, this says ‘fixed income’, that means bonds. This says ‘equities’, that means stock”, and you can start to think about, “Is this the meal I wanna eat? Or do I maybe need to return those buffalo wings and get something a little different?”
00:32:55 TONYA: Absolutely. So it’s important to build a portfolio that is complementary so that everything works together and works for you instead of against you in your financial goals. I think that we have a better understanding of how to build a proper investment portfolio that works for us, right?
00:33:08 EARL: Yes.
00:33:09 TONYA: Let’s have a look at what we’ve learned.
00:33:10
(Music / Chapter 8 Ends with Key Takeaways slide)
00:33:25 TONYA: So there are a variety of ways that people can invest, and there are a variety of options available to them.
00:33:30 DAN: Yes.
00:33:31 TONYA: We could continue to talk about this, but I think we’ve covered really good ground here in giving people a good understanding of the different investment options available to them. Dan, Earl, thank you so much for joining me today.
00:33:42 EARL: Thank you.
00:33:44 DAN: Thank you for having us.
00:33:45 TONYA: Thank you so much. Make sure to explore all of our tools, support, and education. And don’t forget to check out all of our other courses. See you soon.
00:33:54 (MUSIC / END OF COURSE)
