Financial Literacy Investing

INVESTING ● DEFINITION OF INVESTING ○ Putting money into assets with the expectation of earning a return. ● IMPORTANCE OF INVESTING ○ Building wealth over time. ○ Achieving financial goals (retirement, education, etc.). ○ Combating inflation. ● TYPES OF INVESTMENTS ○ Stocks ■ Shares of ownership in a company. ■ Potential for high returns, but higher risk. ○ Bonds ■ Loans to governments or corporations. ■ Fixed interest payments, lower risk compared to stocks. ○ Mutual Funds ■ Pools of money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. ■ Active vs. Passive Mutual Funds: ● Actively managed mutual funds refer to mutual funds that are actively managed by a portfolio manager. ● Passively managed mutual funds typically refer to funds that simply mirror the composition and performance of a specific index ○ Exchange-Traded Funds (ETFs) ■ Similar to mutual funds but trade on stock exchanges like individual stocks. ■ Often lower fees than mutual funds. ○ Target Date Fund (TDF) ■ A target-date fund (TDF) is a type of mutual fund or exchange-traded fund that's designed to help investors prepare for retirement by automatically rebalancing their portfolio over time. ○ Real Estate ■ Investing in physical properties. ■ Potential for rental income and property appreciation. ○ Commodities ■ Physical goods like gold, oil, and agricultural products. ■ Often used as a hedge against inflation. ● KEY INVESTMENT CONCEPTS ○ Risk and Return ■ The trade-off between the potential return from an investment and the risk involved. ■ When investing at a younger age, it is okay to take more risk. However, when at an older age and closer to retirement, it is better to choose less risky options. ○ Diversification ■ Spreading investments across various assets to reduce risk. ○ Asset Allocation ■ Determining the right mix of asset classes (stocks, bonds, real estate, etc.) based on an investor's risk tolerance, goals, and time horizon. ○ Compounding ■ Earning returns on both the original investment and the reinvested returns. ○ Liquidity ■ The ease with which an investment can be converted into cash without significantly affecting its value. ● TYPES OF INVESTMENT ACCOUNTS ○ Individual Brokerage Accounts ■ Standard accounts for buying and selling securities. ○ Retirement Accounts ■ 401(k) - A program that allows employees to contribute a portion of their wages to individual accounts sponsored by employers. Their money will be invested. Employers can also contribute to this account (employee matching). ■ 403(b) - Similar to a 401(k) but typically offered by public schools, non-profit organizations, and other entities classified as tax-exempt ■ Traditional Individual Retirement Account (IRA) - Retirement savings plan that allows individuals to invest pre-tax income that can grow tax-deferred. The IRS doesn't tax capital gains or dividend income until the account holder makes a withdrawal. ■ Roth Individual Retirement Account (IRA) - A Roth IRA, or Individual Retirement Account, is a type of brokerage account that allows you to contribute after-tax dollars to grow tax-free and withdraw tax-free in retirement. ■ Pension - A pension is a retirement plan that provides income after an individual retires from work. It is a fund that employees contribute to regularly during their working years, and then receive periodic payments from during retirement. Usually offered by schools to teachers, nurses, state and local government workers, and unionized workers. ○ Education Investment Accounts ■ 529 Plan - State-sponsored investment account that allows you to save money for a beneficiary to pay for qualified education expenses. Withdrawals for qualified expenses are tax-free and this account may offer additional tax benefits. ■ Coverdell Education Savings Account (ESA) - Tax-advantaged trust or custodial account that can help pay for a beneficiary's qualified education expenses. The account can be used for higher education, as well as elementary and secondary education. ● DOLLAR-COST AVERAGING ○ A strategy where an investor regularly invests a fixed amount of money into an investment, regardless of the price of the investment ○ Works best with mutual funds, ETFs, or index funds ○ Benefits: ■ Reducing emotional reactions ■ Minimizes the impact of bad market timing ■ Reduces risk ○ Drawbacks: ■ The market tends to go up over time - sometimes better to invest a lump sum earlier but not guaranteed ● TIPS FOR SUCCESSFUL INVESTING ○ Start Early ■ Benefit from compounding over time. ○ Stay Informed ■ Keep up with market trends and news. ○ Set Clear Goals ■ Define your investment objectives and time horizon. ○ Review and Adjust ■ Regularly review your portfolio and make adjustments as needed. ○ Stay Disciplined ■ Avoid emotional decision-making and stick to your strategy.