Stocks and bonds, 401(k)s and IRAs – how investment savvy are you? Less than half of Americans have a solid understanding of basic investing terms and concepts. It can be difficult to grow your wealth if you don’t know what tools and strategies are available, much less know how to use them to develop a long-term financial plan. From investing basics to retirement plan funding options, Joe Anderson CFP® and Alan Clopine, CPA, take you to financial boot camp to help increase your investing IQ.
Financial Boot Camp:
- Investing Basics
- Investment Tools
- Fund Investments
Important Points:
- 0:00 – Intro
- 01:16 – Financial Boot Camp
- 02:25 – Asset Classes
- 04:01 – Stocks vs Bonds
- 05:59 – Asset Allocation
- 07:19 – Asset Returns
- 08:10 – Download the Investing Basics Guide – free!
- 08:40 – True/False: More than half of Americans have money invested in the stock market right now.
- 09:33 – Stocks
- 11:00 – Capital Gains
- 11:47 – Fixed Income
- 12:49 – Mutual Fund
- 14:47 – Target Date Funds
- 15:35 – Download the Investing Basics Guide – free!
- 16:16 – True/False: An IRA is the retirement account that most people own.
- 17:03 – 401(k) vs IRA
- 17:33 – Contribution Limits
- 18:22 – Fund Early Projection
- 18:53 – Ask Joe & Al: Do value stocks have a better return than growth stocks? Matt from Nevada
- 19:45 – Ask Joe & Al: Are CD’s safer than bonds? Audrey from Illinois
- 21:04 – Pure Takeaway: Financial Boot Camp – Learn Investing Basics – Explore Investment Tools – Fund Investments
- 21:40 – Download the Investing Basics Guide – free!
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Transcript:
Joe: Are you ready to get in shape folks? I’m talking financial shape. We’re going to take you to a financial boot camp today. Welcome to the show. Show’s called Your Money, Your Wealth®. Joe Anderson here, President of Pure Financial Advisors. And of course, I’m with the big man. He’s our financial coach today.
Al: I’ll take it.
Investing Basics
Joe: Everyone works out. One of the biggest things that people want to do is lose some weight, but another biggest thing that people want to do is put their financial house in order. Alright, let’s start with investing knowledge. 48% of Americans don’t really understand or have a solid understanding of just basic financial terms. What does that mean to the bottom line? Another study says here if we just don’t understand the basics, it could cost up to $2000 a year. Let’s put that back into your pocket. Welcome to Boot Camp, folks. Let’s bring in our own personal trainer, Big Al Clopine.
Al: Alright, well with that introduction, so Financial Boot Camp. Specifically, investing boot camp. So we’re gonna start with investing basics, right? That’s number one. Number two is we’re gonna talk about the investment tools, different kinds of stocks, bonds that are available to you. And third is we’re gonna put all together with investments, how to make this work together.
And Joe, when I think of boot camp, I have kind of a negative connotation.
Joe: Yes, it is challenging.
Al: This doesn’t have to be hard. This is just learning a few things and then getting better educated, making better financial decisions.
Joe: Right. I think going through bootcamp could be challenging.
Al: Yes.
Joe: But once you get out on the other side, I’m pretty sure that everyone is glad that they did it, because they’re probably feeling better, right? They’re in better shape mentally, physically, and everything else. So, when it comes to your finances, it’s just as important. So let’s start with the basics. You know, you look at a couple of these different categories, is that you start with cash because that has the most liquidity and probably the lowest rate of return. And then we’ll kind of work our way through this. Is that let’s lock- look at fixed income, right? So this is another version potentially of cash, is that it’s a safer investment such as a CD, right? But you could take on a little bit more risk. So you could buy let’s say a corporate bond. It’s a loan, you’re lending your money to maybe a corporation or maybe a municipality or a human being, right? And for that loan, you’re receiving interest back. And at the end of the term of the loan, you get your principal back. In case there’s a default, right, then you don’t get that money back, but you would ask for a higher interest rate.
Al: Now, switching gears, when you go into equity, this is not a loan, this is ownership. Right? You’ve got equity in a company, right? And when you get equity, when you have equity with a company, you get to share in profits and stock appreciation. But what’s the downside? The downside is it can go down in value. Company valuations can go up, and they can go down if things are not going that well.
Joe: Let’s talk about real estate. I think most people understand real estate. You might have a primary residence, but you could also have rental properties. Maybe you’ll buy another single family residence and you rent it out. Or you could have fractional ownership of a larger building, a commercial building or apartment building. So real estate is that you’re owning that property and potentially you receive an appreciation from the property and also some cash flow from the rents that you’re receiving.
Al: Commodities is owning things like gold and silver. Pork belly futures, I mean, we can get pretty esoteric here, but the idea is it’s something other than a stock or bond. It’s usually tied into an actual commodity itself, and you can own the commodity. You can own a future. You can actually own a fund that invests in such things.
Joe: All right. Let’s go back to some of the basics here with stocks and bonds, right? So Al, described this. This is equity. You have ownership of that particular entity. A bond, you don’t have ownership. You are lending your money out. It’s a loan. Okay? So owning versus loaning. Return. You might receive appreciation of that overall entity, or they could kick out a dividend. When you look at bonds, right, you’re the lender, so you’re receiving interest back, whoever you loan the money to.
Is there a guaranteed return in stocks? Absolutely not. Is there a guarantee in bond? Potentially. Right? In most cases, you could have some sort of guarantee in some bonds, such as a CD. But in actual bonds, there is no guarantees.
Al: Well, guarantee. I mean, they’re supposed to pay you back, right? You get interest rate and they pay you back.
Joe: But there’s no guarantee they’re gonna pay you back.
Al: Yeah, they can default, I guess is what you’re getting at. So maybe it should be yes with a question mark.
Joe: Additional benefits, right? You got voting rights of the overall company. Bonds. Hey, you get preferred treatment if the company is going south. Right? The bondholder is going to get paid out prior to the stockholder. So you have more safety here than stocks, but lower expected rate of returns in bonds than you do in stocks in the long term. Now let’s put these two together.
Al: Yeah, so you probably heard of you have an income fund, you have a balance fund, you have a growth fund. What the heck does that mean? Generally, that refers to the amount of stocks you have versus bonds. So a typical income, so called income fund has more fixed income, more interest, more kind of regularity on terms of what your payments or income is. So that might be 30% stocks and 70% bonds. When you get to balanced, maybe it’s 50/50 or maybe it’s 60% stocks, 40% bonds. And then when you get into growth, that would be like 80% stocks, 90% stocks, very little bonds, some people, maybe even 100% stocks. That’s what we might consider a growth portfolio.
Joe: You know, you look here and this is a strategy that you want to implement, but you have to have the discipline to make sure that you keep the strategy. But I think sometimes people don’t do the appropriate planning upfront to determine what type of strategy that they should be in. Right? Maybe they should be in a growth portfolio, but they’re actually in an income portfolio. Then they get upset about the returns, and then they kind of toggle back and forth, and they do that when markets get volatile. Here’s a really good example of that. The S&P 500, so the standard stock market, over the last 20 years, has done 9.5%. Right, from 2002 to 2021. 9.5%, pretty good. Let’s say if you had that 60/40 portfolio. 60% stocks, 40% bonds. You’re at 7.5% roughly. Still not bad. Bonds have performed pretty good. 4.5%, 4.3%. But look at what the average investor does. 3.6%. They’re barely pacing inflation over the last 20 years. If I’m all in the S&P 500, I did 9.5%. But the average investor did 3.6%. It’s not because they had a bad portfolio. They had potentially a strategy, but they bounced back and forth. Hey, I want growth. The market goes down. Oh, maybe I don’t want growth, right? Because growth takes pain to get there, so now I want income. So then they lock in their losses. So the average investor does very poorly against an overall balanced portfolio, and of course, the S&P.
Al: Yeah, and when you look at this, here’s just a quick example of how the numbers play out. So, let’s say you had $100,000 for 20 years. If you had a 60/40 split, given the rate of return that we just saw, you would have had about $388,000, right? But if you were the average investor, as Joe just said, you only had $196,000 and Joe, that seems like more than $1800 a year.
Joe: We gotta take a break folks. When we get back, we’re gonna talk about the equipment that you need to become financially fit. Don’t go anywhere. The show’s called Your Money, Your Wealth®.
Andi: For a limited time only, the Investing Basics Guide is the special offer at YourMoneyYourWealth. com. This free guide provides you with the investing vocabulary, tools, and options for funding your retirement plan in more detail than Joe and Big Al can cover here on YMYW. Go to YourMoneyYourWealth.com and download this special offer, the Investing Basics Guide by this Friday.
Investing Tools
Joe: Hey, welcome back to the show. The show’s called Your Money, Your Wealth®. We’re going to talk about the equipment that you need to get financially fit. Before we get there, let’s see how you did on that true/false question.
Al: “More than half of Americans have money invested in the stock market right now.” True or false? Well, that seems true, but Joe, I think you’ve got the slide to prove it.
Joe: Don’t Americans who own stocks, 61%. That’s a pretty large percentage.
Al: It is.
Joe: I would guess it would probably be a little bit lower than that.
Al: Yeah. Yeah, and because a lot of people don’t invest in stocks or bonds, they invest in real estate. Or they don’t really have much in investment, they just have in the bank.
Joe: Yeah, and so, but I think the invention of the 401(k) plan has got a lot more individuals investing in the overall market. So, which is really great to see.
Al: All right, let’s start with tools like stocks, for example. What kind of stocks do we have? Well, there’s large cap and small caps, right? Large cap, large company. Small cap, small company. We’ve got international stocks, which can be large or small. We’ve got emerging markets. These are companies stocks in emerging countries like India, Brazil, for example. There’s other things, too, though. There’s growth, value. Growth would be generally a larger company, not always. But a company that’s growing quickly and priced high. Value stock would be a company maybe that’s not growing as quickly and the stock is depressed or it’s a lower priced stock. And you can make money in all of these. I think of Warren Buffett, Joe, with value stocks has done pretty well.
Joe: You probably want a little bit of all of those different asset classes in your overall portfolio. How you want to mix them up is going to depend on what target rate of return that you’re looking for, and also what is the overall risk that you’re accepting in that portfolio to get you to your goals. So bringing things down to the simplest matters, large, small, international emerging markets, and of course, the home bias of US of A. Now, then it’s just mixing and matching to make sure that you’re doing things appropriately.
Al: Yeah. No question. And then stocks have the advantage. When you sell them, you get a special capital gain treatment, right? So this is when you have stocks in your brokerage account, not your retirement account, not your IRA, 401(k). It’s in your brokerage account. When you own the stock for at least a year, then you get a special treatment and the capital gain rates are zero in certain cases, in some cases, 15%, some cases, 20%. If you sell a stock less than a year, it’s still considered capital gain, but it’s the same as the ordinary tax rates, which start at 10% and they go all the way up to 37%.
Joe: Let’s talk about bonds. Alright, there’s different flavors of bonds. So fixed income. Alright, so that’s just a fancy word to say bond, because it’s going to give you potentially a fixed income stream. So there’s treasury bills. Okay, so that’s backed by the US government. There’s treasury notes, the same as a treasury bill, but it’s a little bit longer in extended immaturity. I could buy corporate bonds. So these are going to be backed by the US, corporate bond is going to be backed by that corporation. So you’re probably going to see a little bit higher expected return or higher interest in a corporate bond potentially than you would in a treasury because a corporate corporation could go bust. And then the safest of them all is CDs. Okay, so that’s backed by the bank, FDIC insurance and so on. So different flavors here of fixed income.
Al: Yeah, and CDs right now are actually paying pretty well. So here’s a little example. What if you bought a 5-year CD and it was paying 4%. What might you expect out of this? You got $100,000 to start. What might happen? So 4% means you’re earning $4000 a year over 5 years. That’s $20,000. But you’re earning interest upon interest. So you end up with about $21,000 extra. But of course, you got to pay taxes at a 24% tax bracket, $5000. So you’d end up with about $16,000 in 5 years, so $116,000 is about where you’d end up.
Joe: Now, a lot of individuals probably own a mutual fund or a packaged product instead of owning the individual stock, right? So the mutual fund company, basically it works like this. You have investors, right? All of us. Instead of buying an individual stock or trying to pick that stock or time the markets, they came up with a mutual fund. And basically what the mutual fund company does is it takes dollars from investors. And then it goes out and it buys equities or buys bonds or precious metals. So you’re going to have a lot more diversity. So instead of owning one stock, you might own hundreds of stocks within the overall company.
Al: Yeah, it’s great for diversification and a mutual fund, it could- an index fund is a type of mutual fund. There’s also ETFs. Then there’s a whole discussion on active versus passive. Active is a fund manager is trying to beat the market by buying and selling. Passive, like an index fund, just owns the market.
Joe: Yeah. So instead of you trying to build it yourself, you know, there’s ways to do it. Of course, you want to make sure that you’re looking at the fees and cost associated with it because the mutual fund company is going to take a fee to package all those stocks together. A more active type fund, when you have a portfolio manager buying and selling and trying to find the winners and getting rid of the losers, might have some higher fees. If you’re just buying the index itself, it probably has a very low fee because they’re just buying all of the stocks that mirror the index as best they can.
Al: Another way to own stocks is what’s called a target fund. These are popular in retirement accounts because what they’re trying to do, they’re professional- they’re professionally managed, and what they’re trying to do is have a glide path, which basically means when you’re younger, they have more stocks. When you’re older, they have less stocks, you got more fixed income, more safety, because now you’re getting to where you need to pull money out of the portfolio, and they do tend to automatically rebalance.
Joe: Here’s a quick example here, is that, you know, at age 35, let’s say if I wanted to retire in 30, 25 years or something like that, I’m going to have more growth investments, right? Because I can take on a little bit more risk, because I don’t necessarily need those assets, you know, for several more years. But maybe when I hit 45, I’m going to have a little bit more fixed income. And then once I reach 65, right? I’m going to have a lot more safety in the overall portfolio because it’s now time to generate the overall income. So this will give you the diversification that you need. You just kind of pick your target retirement date. I think these are good for the average investor. But as soon as you get closer to retirement, it might make a little bit more sense, probably to split this thing up because you’ll have a little bit more choice and control on how you’re creating that income versus having the target date fund do it for you. All right, we gotta take a quick break. When we get back, we’re gonna put your muscles to work, folks. We’re gonna start funding your overall retirement. Don’t go anywhere, show’s called Your Money, Your Wealth®.
Andi: Download the Investing Basics Guide for free. It’s the special offer right now at YourMoneyYourWealth.com, but only for a limited time. Learn the basic vocabulary of investing, the tools you’ll need and options for funding your retirement plan. Go to YourMoneyYourWealth.com and download this special offer, the Investing Basics Guide by this Friday.
Fund Investments
Joe: Hey, welcome back to the show. The show’s called Your Money, Your Wealth®. Joe Anderson and Big Al, getting you in shape with our financial boot camp.
We’re gonna talk about putting your muscles to work here in just a second, but let’s see how you did on that true/false question.
Al: “An IRA is the retirement account that most people own.” True or false? Well, Joe, I think that’s actually false.
Joe: Shocking.
Al: Right?
Joe: I thought for sure true.
Al: Yeah.
Joe: But, look at this, 14% in defined benefit or cash balance plans, 18% IRAs and KEOGH plans. Alright, and then we got the 401(k) plans, 35% have 401(k)s. So defined benefit plans is the old pension plans, right? So I can believe that number, right? So when you work for the company, you got that, you know, nice guaranteed paycheck for the rest of your life. Those are by the wayside, and then the 401(k) took that over. But IRAs have been with us for quite some time, 1974, something like that?
Al: Yeah, I think that’s right.
Joe: Okay, what is the difference of a 401(k) and an IRA? Well, a 401(k) is employee sponsored and an IRA is that’s your individual retirement account. You might get an employer match with your 401(k). Not with an IRA, right? Just you’re funding it. There’s other funding limits and things like that. Pre-tax, IRAs, you take a tax deduction or you can go a Roth IRA, which is after-tax, which grows tax-free. 401(k)s and IRAs, Al.
Al: Now, how much can you put in each of these plans? So let’s start with a 401(k). That’s more, right? $22,500 for 2023. Another $7500 catch up if you’re 50 and older. So that’d be $30,000, someone 50 and older could put in. IRA? Much less, right? $6500 or another extra $1000 if you’re 50 and over, right? And you can do both. A lot of people don’t realize that. If you’re in a 401(k), 403(b) plan, you can also do an IRA and in some cases a Roth IRA as well.
Joe: It always pays to start early. You’re 20 years old and you’re saving $3000 a year and you get that 6%, $638,000. Pretty good. If I wait 15 years and I still save that $3000 a year and get that 6% rate of return. Look at that. $230,000. If I wait till 45, $110,000. So I’m looking at to age 65. So if I started at 20, $638,000. If I hold off and wait a few years, it just free falls. It’s the compounding effect. Because the contributions are very similar. But look at the earnings, because it gives it time to grow.
Al: No question. And I think a lot of people fall into that camp. They maybe start between 35 and 45. That’s why the IRS is giving you a catchup at age 50. Make sure you take advantage of it so you can catch up to where you would have been had you started much earlier.
Joe: Alright, let’s switch gears, Big Al. Let’s turn the show over to our audience and answer your questions.
Al: “Do value stocks have a better return than gross stocks?” from Matt. Great question. You know when you look at long term, like the last 50 years, 100 years. The answer is yes, right? But the real answer is, it depends what time frame you look at. If you look at the last 10 years, the answer is no. But when you look at long term, they tend to have a little bit better return because you have to take a little bit more risk to get their return.
Joe: Historically value stocks have a higher expected rate of return than growth stocks because there’s a little bit more risk associated with that. But you could, as Al said, you just look at the timing of this and you can pick certain time frames and growth stocks have significantly outperformed value stocks. You look at other time frames and value stocks have significantly outperformed growth. So I think that’s why you want to probably own both of them.
Al: “Are CDs safer than bonds?” from Audrey. Probably because of the FDIC insurance limits. But what do you think, Joe?
Joe: Yeah, CDs are very, very safe, right? If you take a look, I mean, a treasury bond is pretty safe as well. So, a CD is structured a little bit different. It’s issued by a bank. You got FDIC insurance. A bond is issued either by the US Treasury. It’s issued by a corporation. It’s issued by a municipality. So by definition, a bond is probably riskier than a CD but there are very safe bonds. So it really depends on what your goals are. Are you looking for the safest investment? Are you looking for a certain expected rate of return? So instead of collecting investments, hey, I want a CD. What rate of return is it? Or I want a bond. Is it safe? You want to take a look at an overall global portfolio to make sure that you understand the risk and expected return of everything that you own collectively. Versus say, hey, I want this growth stock or I heard value stocks are better than growth stocks or I heard CDs are better than bonds. Right? They’re all good, right? All tools are used for different things. So you want to make sure that you have a full tool kit and same with exercise equipment. If we want to go to this whole boot camp thing is that if I’m working on certain body parts, you use different types of equipment. So what did we learn? Well, we learned investing basics, stocks versus bonds, large cap, small cap, things like that. We looked at tools, right? How do you go about implementing some of the things that you learned? And then we looked at how to fund it all. Hopefully enjoyed the financial boot camp. Hopefully we got you a little bit more in shape when it comes to your overall finances. For Big Al Clopine, I’m Joe Anderson. We will see you next time folks.
Andi: For a limited time only, the Investing Basics Guide is our free special offer. Download it by this Friday at YourMoneyYourWealth.com.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
