Five Concepts To Understand Before Starting To Invest

 Today starts our five-part series on Steps to Start Investing

9/4/24 (today) – Five Important Concepts to Understand
9/11/24 – The Importance of Diversification
9/18/24 – Choosing the Right Type of Account (Joint, Individual, Roth IRA, Traditional IRA, etc.)
9/25/24 – Where to Invest (Banks, Brokerages, Roboadvisors, Money Managers, etc.)
10/2/24 – What to Buy (Stocks, Bonds, Funds, ETFs, etc.)

"I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong. If we will only allow that, as we progress, we remain unsure, we will leave opportunities for alternatives. We will not become enthusiastic for the fact, the knowledge, the absolute truth of the day, but remain always uncertain … In order to make progress, one must leave the door to the unknown ajar."
— Richard P. Feynman 

FIVE IMPORTANT CONCEPTS

1. Liquidity - What happens to my money when I invest and how do I access it if I need it?

When you invest, your money is used to purchase assets like stocks or bonds. Liquidity refers to how easily you can convert these investments back into cash. Highly liquid assets, like stocks, can be sold quickly if you need access to your money. However, remember that selling might mean missing out on future gains or selling at a loss.

2. Risk Tolerance - What is my comfort level with losses?

Your risk tolerance is your ability to withstand fluctuations in the value of your investment portfolio. Higher-risk investments, like stocks, offer greater potential returns but can also experience more significant drops. The best way to minimize losses in your portfolio is by 1) diversifying and 2) adopting a long term approach to investing.

3. Taxes - How are my investments taxed?

Buying and selling securities can trigger taxable events, meaning you may owe taxes on any gains. Long-term investments (held for over a year) are usually taxed at a lower rate than short-term investments. It's important to be aware of how your investments can impact your taxes so that you're not caught off guard.

4. Asset Allocation - What do I buy to start?

Asset allocation is about how you distribute your investments among different asset types, like stocks, bonds, and real estate. While it can seem complicated, as a beginner, focusing on stocks is a good start since they offer the potential for higher returns over time. As you gain experience, you can explore other types of assets to diversify your portfolio.

5. Fees - Should I be paying high fees (for a good manager) or low fees?

In most cases, the more we pay for something, the more we receive in value. When it comes to investing, the exact opposite is true. Every dollar you spend in fees is a dollar that's not growing for you. And, it's not like if you spend a dollar now, you get a dollar less in the future. Spending a dollar in fees now, is like having $20 less in the future.