Guided Path 3-1 Investing Basics

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The wait is finally over… Season 3 has arrived! If you are someone who is wanting to jumpstart or even just enhance your investing journey, then you are going to love this season of The Financial Call! In this episode, Zacc Call and Laura Hadley introduce the topic of season 3, which is investing. They discuss what learning opportunities you will have throughout this season, and the nitty gritty details of kickstarting your investment portfolio. Zacc and Laura discuss: How inflation impacts your investment portfolio, how to decide where you want to invest and which accounts you should invest from, what a decision order is and how to find yours, how investing strategies look different when planning for retirement compared to saving for college, and more.

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[00:00:00] Welcome to the Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have, whether you're doing it yourself or working with a financial advisor. These episodes will help you break down complicated financial topics into practical, actionable steps. Our mission is to guide motivated people to become financially successful. Hello, everybody. Welcome to The Financial Call. Laura and I were just talking about this. We're starting our third season. Which feels really good. It does feel good. We're making some headway here. Yeah. If you haven't listened before, there are about 48 episodes of Randomness and, and just about anything that I thought should be discussed from a financial planning standpoint. Now that's good. You can search for and find whatever you'd like. And there were some interesting ones back then that we finally decided to really organize it in a very specific order. If you've been listening along, you understand we're working through a guided path. The guided path has eight 

[00:01:00] different topics. The first one is income planning, the second one is social security. Each of these are a season and within income planning, we did what, let's see, I think five or six episodes, and we organized specifically retirement income planning. Like social security, pensions, income risks, withdrawal strategies, and then income planning for young people. And then we did a whole season on social security, and I know that's probably specific to people close to retirement or in retirement, and that's okay. We do a ton of social security planning. If you are subject to penalties or you have unique social security situations, this would be good for you to listen to, even if you're. And then investing. I think this is the one that we get the most questions about. Yeah, and this is the one that applies to everybody, right? No matter what stage of life you're in, everyone should be investing. So this will be really applicable. I think this is the first season that really all of our listeners can benefit from. I feel like when I start to get questions about this, 

[00:02:00] about investing from my wife, it's either because markets have done really, really well, or they've done really, really poorly. We're in that downswing right now, which is crazy cause just not too long ago it was crazy high. People are asking about Bitcoin and NFTs and here we are now, the markets are down and everyone is panicking. Should I get out of the market? So it's true. People ask about it when we're in the extremes. Now, just so you guys know, it's late July of 2022 that we are recording this, but because they're coming out in order and we're trying to get ahead a little bit, Laura is expecting a child at some point in the end of the year. I think you said November to December. December, yep. Little Christmas baby. Cool. So we'd like to get ahead enough that that every other week frequency can continue and I think we're doing good. So we're about a season ahead. As of this moment, most of season one has been released, but by the time you're hearing. You'll be into the beginning of season three. So within investing, we're gonna talk about the basics today, which Laura and I are

[00:03:00] also joking. It's gonna be really hard for us not to go down into rabbit holes with this. Yeah, there's a lot going on, but we'll give you an overview, things that you should know about investing, and then we'll continue on next time. We're talking all about stocks. And then after that we'll talk about bonds, talk about different funds in one episode, and then we'll talk about real estate and then options, futures, private markets. Just like every season, we're gonna start off with the basics. So no matter where you're at with your knowledge of investing, Start off here and then we'll build in each episode. When I built the guided path concept and first threw it out to you, I built out this season. This was the first one that I mapped out. Yeah. I took a piece of paper and you know how they teach you in school to draw circles around the concept with lines and then more circles, and I don't even know what kind of that is. I pretend I can't remember. I have no idea. But that type of diagram, I did that with this particular season, so it's the one that sparked it all off, and I think it's because it's difficult. To understand, it's hard to find information at your 

[00:04:00] level within investing because you go read the news and maybe they're talking about some sort of investment product, solution, or type that you're just lost on. Or you spend some time just trying to get the basics and they move too fast. And I just think we're gonna do a, I hope a decent job helping you. However fast you're moving that will catch up to you cuz we're gonna go through it and then you can start running forward with us. So today is all about the basics of investing and so we wanna start first with why it's important and I think this is confusing cause people don't realize how important investing is. I think that's partially because inflation has been so low for a long time. The inflation numbers just came out recently and we saw a 9% inflation rate, which is huge. We've been seeing two and less for a long time. The average has been like 2.18% over the last decade, so Laura and I were just messing around with some numbers. Get a feel for this really quick. If you sat on $10,000 for the last decade,

[00:05:00] Your $10,000 would be worth about $8,019 due to inflation. Just that 2% inflation basically gave you a 20% loss in your portfolio just because you didn't invest. So I always feel like the easiest way to guarantee a 20% loss is to just put it in cash and just to explain, you're still gonna see that $10,000 amount in your bank. It's not like it's actually going away, but the value of it is about $8,000. So you can buy the same amount that 8,000 would buy you. So just the value of your dollars is less. I guess we should clarify on that. Yeah, that's true. And that's where it starts to get a little bit confusing when people talk about future dollars and present dollars, and you have to understand what they're referring to. But you're right. I mean, you basically would be able to buy 20% less in 10 years. That's at 2.18%. The recent numbers came out at 9.06% inflation over the last. So if that continued for a decade, your 10,000 would be worth 

[00:06:00] $3,868. Wow. And people are feeling that right now with gas prices and increases. Your grocery bill. People are filling that. Yeah, my niece is trying to fill up her car. She's in high school. It's very different because you're just scrounging. Change wherever you can find it, right? Totally. Yep. Fill up half your tank cause that's all you can afford that day. That's five and a half dollars a gallon. It's a lot. Just more numbers. Just give you an idea. A 5% inflation takes you down to about $6,000 over the decade. Now if you put the money in the S&P 500, not that we're saying everybody should invest a certain way, but it's the most common index, 13% average annual over that time, which is surprising that it's that high. That includes a lot of volatility. That's a $34,400 value at the end of that decade. It went from 10 to 34. In actual dollars. Wow. We talked about real dollars. It'll say 34, but it won't feel like 34 today because of inflation. Because we still have inflation. Yep. So if we use that same inflation number, it would

[00:07:00] feel like 27,000, almost 28, which is better than 8,000 and better than 10, better than anything. So the bottom line is this is important for you to understand so that you invest and it's most difficult for retirees to understand this. Because they think they're at this moment, this inflection point where they no longer have to worry about long term investing. Many retirees will live 10, 15, 20. This is a 10 year period that we're talking about here, and they could literally lose half their value if they don't invest in things that make them money is brutal. So we're gonna talk a little bit about how you do that, but the first thing, well, I guess before we move on to like the layers of investment types, accounts and all of that, would you add anything to like the. I just think it's easier to reach your goals when your money is making. For you? Well, if you're the only one that's going to work and make money, it's gonna take a long time to reach your goals. But if you can put your money to work and have it make money on its own, you're gonna be able to reach your goals that much faster. So not 

[00:08:00] only just to keep up with inflation, but be able to reach your goals and get to a point where maybe you don't have to work as much because your money's working for you. That's a really good point too. When you talk about investing, there's a full-time job which pays you money. You're trading your time for money in that case and knowledge and skill and all of that. And then, On the other end of the spectrum, there's pure investment where you put money to work and you don't even have to think about it Somewhere in the middle. You have side hustles where people make money, but it's not their full-time job, and maybe they don't take a ton of time to do it. Be aware that sometimes you can confuse a job and an investment by accident. Sometimes people think they're investing when in reality they just have a self-employed business that's a side hustle consulting gig or something like that. Keep in mind, you wanna think about ways that the money works for you without you having to work very much. So don't confuse a job with an investment. How's that? That's what we talk about with passive wealth creation. It's passive for you cause it's working for you. Okay? So oftentimes I get asked the question, should 

[00:09:00] I buy a certain stock or should I buy a certain investment, which is actually about the third or fourth question that they should be asking, and they're skipping. The layers of investing and layers in this case are meant to help you understand it not as a bad thing. So let's say so first. You need to decide the place like the custodian, where you will invest. That would be places like TD Ameritrade, Vanguard, Fidelity, Schwab. These are all like more of the discount locations. There's more expensive, or they call them wirehouses or places where advisors typically hook up would be Morgan Stanley and their Goldman Sachs, and a lot of other firms like that. That is the custodian, the person or the company that custodies your assets or holds them. So we're giving you these definitions so that you know as you're walking into a conversation, either on your own reading things or with an advisor that you know what in the world they're talking about. Yeah, exactly. And a lot of times 

[00:10:00] the institution is chosen for you. Your employer will choose which custodian is gonna hold your 401k. Yeah, that's a good point. That's a really good point. So in that case, with a 401K and a 403B and most employer plans, they are directly tied to a custodian. When you leave the employer or when you retire, you can move, you can change the custodian of your assets account type. So this would now be, there's some sort of government rule or tax code that allows for certain retirement accounts to exist. And so this would be like an individual retirement account that is an IRA. If I'm not mistaken, somewhere in the code it actually is an individual retirement arrangement is the actual, Oh, didn't even know that. Yeah, I think the word is arrangement in the actual code. Anyway, Then 401k, that's an employer sponsored plan. There are Roth accounts and you could have small business accounts that like simples and steps. We're not gonna go into all of these account types, but that's the next step.

[00:11:00] So we're not talking about individual investments yet. We've talked about, okay, are you picking this custodian? Then within that custodian, you're picking a certain account type and account type we haven't talked about yet, but that is one of those, like one of my favorites is just a non-retirement account. Being able to invest outside of any retirement account makes it so you can move money in and out of the portfolio freely without IRS or Arisa imposed penalties for moving it back and forth. So like you could have a 10% penalty for withdrawing from retirement too early. If you just do a non-retirement brokerage account, you can move money in and out all you want. All the new kind of the next generation, they've been putting money into places like Robin Hood and typically it's a non-retirement account that they're just throwing money in. Okay, so that's account. Tax type is the next, and there are three main tax types. There is traditional Roth, and then we call it after tax. Laura, I feel like you have a gift for just like, can you just make this simple for everybody? We'll try, yeah, and we'll talk more about this

[00:12:00] in the tax planning season, but basically traditional are dollars that you're waiting to pay taxes on. Your income may be high, and so you're putting all the dollars there. Usually inside of a 401K or an ira, you're just deferring the taxes, the Roth. Is the opposite. So you can have a Roth ira, a Roth 401k, it's the tax type. Basically you're choosing to pay taxes now and then that grows tax free, so you don't have to pay them ever again. The after tax is interesting. All the dollars that you're putting in are after tax dollars. You've already paid taxes on it. However, it doesn't grow tax free like a Roth account. This one, you do have to pay taxes just on the growth that you have inside of the account. So if Zach, if you put in $10 into your brokerage account, your after tax account, It grows to $15. You have to pay taxes on those $5. That $5 growth when you sell it. Yes. If you just don't do anything with it, you just let it sit there. You won't pay taxes for many years and that's like your bank account. If you put money in your bank and you earn 

[00:13:00] $5 over five years, that's probably how long it takes to earn $5 in your bank account. Because they don't pay anything. But you do have to pay taxes on that $5. I knew a guy who was back in the eighties. I met him not in the eighties, because I was born in the eighties, in the early eighties. Anyway, I met this guy that in the early eighties, he put $180,000 into his employer stock. He believed in it, but the company was almost bankrupt at the time. Wow. And everybody told him he was crazy and then he just left it and never did anything with it. It was his entire retirement savings. And he left it for decades. And I met him in, it was about 2013, 14, and it was Macintosh at the time, which is Apple. Wow. So he had, at that time, about $62 million. Oh, Apple stock. And it started with $180 and it started with $180,000. Wow. And he could not sell it in his mind. I mean, obviously he could have sold it, but in his mind he would not sell it. Because of the capital gain 

[00:14:00] associated with it. Yeah. Now the reality is the capital gain tax for long term capital gains is less. We'll talk about that in the tax season, but that gives you an idea of how an after tax account works. He went for decades. Now, at that time, Apple announced a dividend. And I was talking to him about it and he's like, I don't know what I'm gonna do with $159,000 a year. And I was like, Oh, my friend, gosh, is $159,000 a quarter, not a year. Oh my gosh. Anyway, that's crazy. That was kinda a fun one. But that gives you an idea on how an after tax account works. Maybe we can talk about dividends a little bit. Dividends. If a company does really well, they're earning a lot, instead of putting that money back into the company, they'll pay it out to the shareholders. So he just gets that much money for owning the stock. And then he has to pay taxes on that at that time, and it's a great way. There are some investments that focus on that. So I guess we're moving on to that fourth layer. Let's do it. So you have a custodian where we're refreshing. Here, custodian, then that's where the money is held. In what institution? Account

[00:15:00] type. That's the structure of the rules that allow that account to exist. Then tax type. This is whether you've already paid taxes on it, you will pay taxes on it, or you're paying taxes as you go. Those are the three main types of Roth traditional and after tax. And then the last category is the actual investment. Now, so sometimes people ask the question, Well, is a Roth risky? And say, Well, it has nothing to do with risk and everything to do with taxes. The risk is introduced with what investments you put in the Roth, and you could be as conservative or as aggressive as you want in a Roth or traditional or after tax account most of the time because people want to diversify or spread out the risk of investing. They like to buy many different companies or many different things. So imagine if you bought, if it happened to be, I don't know, Quest or Enron instead of Apple that that guy had purchased like Enron, he would own nothing at this time. He would've 

[00:16:00] lost all 180 something thousand dollars. Instead, and so there was incredible risk that he took. Obviously it paid off. There are way more stories where it doesn't pay off than there are where it does. So most people will diversify, and we'll talk a little bit about that more in the stock section, but even just diversifying that across 10, 15 stocks reduces your risk of losing everything. Incredibly, and we hear this all the time. People say, I don't wanna put all my eggs in one basket. That's how you avoid doing that, is putting just a little bit into lots of different investments. That way, if one investment does really well, you get a piece of it. If one investment does very poorly, you only get a piece of it. So now one way to diversify is to buy funds and there are multiple types of funds. We're gonna go over that in a future season or a future episode in the fourth in, Tim is gonna join us. Yeah. Okay. So we won't go too far into funds, but there are different types. Just know that they are a basket of investments allowing you to diversify. That's how you start to think about the individual underlying holding.

[00:17:00] And I'm gonna skip to that last section here, Laura, because it feels like it fits. But really, most investments can be narrowed down into ownership or debt. Are you buying into something and you own a piece of it, or are you lending an institution or a person? Money. So it's either ownership or debt. Now there are others, There are contracts with agreements that upon certain occurrences, whether that be, we'll talk about options and. That's more complex, but in most of the investment world, you could categorize either under ownership or debt or some combination of both. That exists too, and I think that's helpful. As you think about an investment, most of the time ownership is higher risk. Let's say the business goes. Completely under that was the risk you took that they would go completely under. And so if it goes under you own nothing cause it's not worth anything. But in debt, if the business stops operating, if they have any assets or any value of 

[00:18:00] anything they can sell, they'll pay off those who have lent them money first. And there are also caps on the growth potential that you have. If you're buying into a company like Apple, it has endless opportunities for growth. So if you own a piece of it, you can see that growth is limitless. However, when you're lending money to a company, they're saying, Okay, we're gonna take this much, We'll pay it back to you eventually, and we're just gonna pay you this much to borrow that from you. So there's less risk in debt, but there's also less earning potential. Yeah, and we're talking generally, it's not always the case. There actually are some stocks that from a risk standpoint might be more conservative than some really high risk bonds. True. But across the board, what we're talking about here is generally most stocks have a higher risk than bonds do, and that's why you see them fluctuate more on a day to day basis if you ever watch any of the market indexes. So I guess we could clarify the stock. Is ownership in a company and a bond is giving or lending money to a company. Yeah, and there are lots of different types of bonds. It could be to 

[00:19:00] a company like at and t would borrow money to help with their operations or for growth, or for whatever reason they may feel like they need to buy new land, new real estate, whatever it may be. They would borrow and then they would put out a bond, and anybody who wants to buy that bond can go ahead and buy it and own and make some interest there. What about like a municipality? So a local city may need money and you can lend to cities and states and the federal government. So that's what treasuries are. If you hear the word treasury, what you're talking about. Is a bond where the government is borrowing money and you have actually lent the government money in that case, which is kind of a weird concept. You don't get paid very much for lending the government money. Because they're so low risk. Because they're reliable. Yeah. They can tax however much they want to pay those interest payments. And I always say each bond has basically a credit score. It's like when you go to borrow money from a bank, they give you a credit score to see how likely you are to pay back that. Different bonds have different credit scores on it, and 

[00:20:00] so the government, they have a good credit score. They're most likely gonna pay you back. So it's less risky. If you have a company that maybe doesn't have a very good credit score, you're probably taking on more risk. Yeah, and that's our third episode, so we'll go into this in more detail, but bonds have a, what's called a spread, like the difference between government bonds considered the most conservative and how much at and t has to pay, for example. That's their cost of being a. Or a risky investment. So anyway, that's the spread. We'll cover that a little bit more in the future, but that gives you an idea. So I would, if you go through this order, we're gonna talk about the decision order. So the first year decision is how much should you invest? And that's more of a financial planning conversation than an investment conversation. And obviously investments, it's one discipline within financial planning. But the idea is you want to save enough. Based on rough projections that you're going to meet your goals, whether that's to buy a home, retire, help with kids, school, whatever that may

[00:21:00] be. It might be just how much you can afford. That's true. How much extra dollars you have to put somewhere that might be your decision maker of how much you have to best. That's true, and in reality, that's usually how it starts, Laura, is someone just puts what they can away and then later they see a little bit of success in it, and then they revisit. And they actually run a projection and then they may save a little bit more as they make more money. I think that's wise to just, Why don't you start with what you can. We talk about this in other episodes, but if you're getting a match within your 401k, let's start there. At least get some free money out there, and that's an easy way to invest. Take it straight from your paycheck, put it in the 401k. Usually the 401K company will have options for you to invest in. They're pretty simple. Plug it in, set it, and. So then the next choice, which is a great example of let's say you're doing the 401k, then you have to decide between am I making these Roth 401K contributions or traditional 401K contributions? And if you're 

[00:22:00] doing 10,000 to each, then that means you're putting 10,000 after tax money and you won't get a deduction on your income. You meaning you won't get to reduce your income for the Roth contributions you will get to reduce your income for the traditional contribu. And that will help out your taxes a little bit, but it depends on your tax rate. And this is also a question for people who are not just contributing. This is a question we work through with most of our retirees every year where we're deciding it's not just a matter of contributions. Everybody has the ability to do a conversion, they can move money. We're gonna talk about this in tax as well. But from the traditional to the. So it may make sense to even move some money over afterwards as well. That's part of that decision. But anyway, how much should you invest? What is the account type? And then finally you have tax type. And then lastly, Investments and that's where we're gonna get more into stocks, bonds, and funds in our next three episodes. I know many of you are probably thinking like, Well, great, we didn't even get into the

[00:23:00] investment. You're right, because you keep asking the fourth question first. Yes. So giving you the first three questions you should be asking and then figure those out. Even if you buy something like a very simple investment that you don't fully understand, but it's diversified across a broad market of stocks, then you're gonna be okay for the $50 you start the account with. You know what I mean? Now, if you have a decent amount of money, then you probably do need to pause and we need to spend some time on that last category before you just go and pull the trigger and make decisions. What else would you add? Just with investments? We'll talk about this, but it really depends on your time horizon with that money. If this is long term money that you don't need for 30 years, your investment choices are gonna be a whole lot different than if this is money that you're gonna need in three to five years for college or for a down payment, or whatever it is. So the time horizon of your money is huge in determining your investment choice, for sure. The odds of having a positive market. Go up extremely. If you give it a little bit of time. I was in 

[00:24:00] an appointment with Tyson just before we started this call or this recording. I don't know if he'll be on for investments. We'll have to check. But he has this chart. He likes that it showed any one day had like, it was either 54 or 56% fluctuation, either positive or negative. Basically flip a coin and you have a 50-50 chance of having a positive or negative outcome on any given day in the stock market. A day, A single day. Every single day. Yeah. Just on a single. But the combination of all of those over the course of a year, it took that up. I think it was like in the sixties or seventies, and then three years it pushed it up in four years and it gets closer and closer to the nineties as you go out to 10 and 20 years, if you're stressed about the individual days, completely understandable, but probably shouldn't be looking at it quite that frequently. If we're long term investments. And short term investments shouldn't be in the stock market or anything aggressive like that. We'll talk about non-stock investments as well. We tend to manage a lot of client assets over broad asset classes. 

[00:25:00] That could be real estate, commodities, stocks, large, mid, and small, and international and developed. We're gonna go through all of those different types of investments in these future episodes. Stick around with us. Hopefully this gets you started. Let's recap. Start with the custodian next to the account. Then choose your tax type and then let's go over investments, and we'll get started with the next one. Thank you. This podcast is intended for informational purposes only and is not a substitute for personal advice from Capita. This is not a recommendation offer or solicitation to buy or sell any security. Past performance is not indicative. Or for future results, there can be no assurance that investment objectives will be achieved. Different types of investments involve varying degrees of

[00:26:00] risk, including the loss of money invested, therefore, It should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or proposed by Capita will be profitable. Further Capita does not provide legal advice. Tax advice. Please consult with your legal or tax professional for advice prior to implementing any strategies discussed during this podcast, certain of the information discussed during this podcast. Is based upon forward looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. 

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