Tag Archives: Index Funds

Right Mix of Investments

The app Robinhood has helped many new investors to monetize stocks. Previously stock investment was only for the rich and the wealthy because most brokerage firms required a minimum assets to open an account. Additionally, there is a fee for each transaction. Unless the transaction would generate a positive spread there is no reason for anyone to buy and sell stocks.

Recently Robinhood was put on the spotlight because there were a number of news how some investors took too much risk and lost a lot of money. The worst news was a 20 year old committed suicide because he thought he lost $730 thousands from betting on options. Investing in stocks are risky. Anyone who want to invest in stock needs to understand the risk and each investor needs to know his/her risk tolerance.

There are a number of experts who continue to point out that to minimize losses in stock market is to diverse their holdings. For new investors, they need to at least have a basic understanding how stock market works and what are some of the investment vehicles that are available to them in the open market. The question is what is the right mix of investments for a new investor?

How Much Risk

There is no clear answer on what is the right mix of investments because everyone is different. There are some who has a lot of liquid assets and willing to bet all. On the other hand, there are some investors who want to dip their toes in the water and would not take any risks. I have been investing in the open stock markets for over 3 years and majority of my assets are in the traditional retirement income of which I have no control over what to invest in. I learned to understand how much risk I am willing to take and that in turn helps me to understand what mix of investments that works for me. Below are some guidelines that I hope you find helpful.

Understand Your Financial Standing Before Investing

Although investing in stock has become easier for the mass, it is still not for everyone. The type of people who should be discouraged from investing are those who are having difficulties in earning enough to make ends meet and those who have high debt. Investing involves taking a large sum of funds and put it in a basket that could lose value.

Before an investor start investing, the person should take stock of his financial status and determine if he has the means to invest the money otherwise meant for sustenance. In 2018, the Federal Reserve Board did a study and found that 40% of Americans do not have $400 in the bank for emergency. The rate today could be higher due to the pandemic. A lot of Americans borrow from their credit cards to meet daily needs, including investing in stocks. There was an article in July 2020 of how an investor started investing by borrowing from credit card and with devastating results. Investing in stocks is risky and there is a likelihood that you could lose value. No only you could not recoup your investment you are now liable for the money that you borrow.

Separate Asset into Categories

Investing in stock market is similar to gambling, but legally. Like all gambling, you could win all and you could lose all. To minimize the risk of losing all, it is advisable not to put everything in one bucket; experts call it diversification. As noted earlier, majority of my assets are in retirement account. I only have 10% of my asset invested in open market. Additionally I further diversify my investment to further minimize the risk and maximize the return. To achieve this I categorize my holdings into 3 categories and I also put in how much percentage I own.

  1. Long Term Investment (15%) – These are the bonds and index funds that are stable. While the returns are minimal, the likelihood of them losing value is reduced due to the fact that they are consolidation of multiple stocks.
  2. Capital Generates Passive Income (60%) – These are stocks of companies that are reputable and in good financial conditions. These companies remain to be profitable and are not likely to be at risk of default. The stock prices continue to be in the upward trend. Additionally, these stocks pay dividends, which is a type of passive income.
  3. Play Money (25%) – I consider these stocks that are volatile and likely to lose value easily. However, volatility is also positive because to generate the spread is by buying low and sell high. These are the stocks that I will trade. These stocks to not pay dividend.

How Much Are You Willing to Lose

In an ideal world, we want to make money from stocks. However, stock markets go up and down. Hence, there are chances that one could lose money from stocks. Before anyone starts investing, he should set a limit of how much money he is willing to lose. Knowing the limit will minimize the risk of losing it all. The important question to ask is what sacrifice will you be making if you lose the money you invested.

Learn When to Quit

One of the important things I learned for the past year is know when to “sell” the stock. A profit is only realized when the stock is sold. On the other hand when the stock price falls below at a certain level, it makes sens to sell it before it goes any further. I learned the hard way when the Luckin Coffee stock that I owned continued in a downward spiral that there was no way for it to recover. I was holding to the hope that it would go up. Unfortunately that did not happen and the stock was subsequently delisted from Nasdaq. I lost over $900 when I finally sold the stock before its value dropped to $0.

One of the biggest challenge that I face is what happens when the stock prices of the company continues to go up? The premise in a stock market is buy low and sell high. However, I tend to hold on to these stocks especially if they are from reputable companies and they pay dividend.

Is there a right mix when it comes to investing in stocks? Yes, and it depends on one’s preference and how much risk is he willing to take. Before taking a big step in investing, it is also really important for the investor to understand his current financial status.

Investment Priority (Part 2)

Grow Your Money

“Investment” is an umbrella term of giving your hard earned money to someone else in hope of multiplying the value after a set period of time. Investment includes many options. The question is what should you invest in?

As a disclaimer, I’m not an expert in financial markets and I’m not a Certified Financial Planner (CFP). The message that I’m conveying today is based on what I learned over the years and based on some of the research that I’ve done. Investing comes with risks and there is no guarantee that a positive return can be gained from investment.

The first investment vehicle that I was exposed to was 401k retirement plan from Arthur Andersen. As I started to pay for my taxes, I learned about Individual Retirement Account (IRA). Over time I was exposed to stocks and bonds. There were others such as Foreign Exchange, Options etc. The amount of investment vehicles that are available are mind boggling. How do we expect regular people like us to understand what they are and what they do.

The purpose of this blog is not to cover all investment vehicles but to highlight the minimum types of investments that everyone should invest in. Additionally, my goal is to clear up some of the confusions that many young people have when they were first exposed to investing their money. In the sea of investing options, which boat should you take that will bring you to your dream sunset? The bigger question is which boat will not sink because you put too much weight on it and which one will stay afloat.

I still remember the first day of working at Arthur Andersen. I was given the employee handbook along with employee benefits. One thing stood out was 401k retirement plan that Arthur Andersen was offering. The company was providing matching contribution up to 6% and the contribution was vested immediately. Two terms stood out, “matching contribution” and “vested immediately”. I had no clue what they meant but they peaked my interest. Upon further research, I realized that I can save for my retirement without lifting a finger and I was getting free money from the company. Additionally, the amount that I invested in the plan was immediately put into the market and start growing.

I thought that by investing 401k retirement plan that I would have enough to retire when I reach 65. Unbeknownst to me that 401k will only generate a very small portion the retirement income; I will need supplement income to enable me to retire comfortably. We live in the greatest age of financial markets where there were many before us thought of this question. In the past century many economists came up with all scenarios and many experts in this field came up with all kinds of solutions. The end results are new investment options were created. The government recognized this and several acts were enacted to assist retirees when they retire.

I began to dig a little deeper to find out what are other investment vehicles that will fulfill my retirement needs. I realized that investing is not only based on the types of investments but should also be based on age and risk tolerance. For example, if you are in your 30’s your risk tolerance will be higher then people who are in their 50’s. You would be willing to invest in stocks which carry higher risk of volatility than in bonds. Higher risk such as stocks usually generate higher return than bonds.

There is no magic numbers when it comes to what are the best combinations when it comes to investing. There are so many books and articles written on this subject. Some investors would prefer to invest heavily in stocks while some would prefer bonds. While some would invest everything in 401k only. And there are others who would risk everything in high return/high risk investment.

I started to deal with this question only when the economy collapsed during the housing bubble of 2008. I saw my 401k retirement plan dropped half of its value. I saw the stocks options that I received from my company at that time, Citigroup, dropped from $54 to $1. That was the worst time of my life and I realized that I may have to continue to work even when I retire.

To minimize the risks of losing money and to ensure stable return, I found out that I need to mix my investing strategies. I’m not 100% there yet because I continue to prioritize my personal finance. However, I do suggest that you prioritize your investment as follows:

  1. Invest in tax deferred qualified 401k retirement plan – Most companies today no longer offer pension plans because they are costly to companies to invest and maintain. However, most large companies offer 401k retirement plan. If you are working for a company that offer 401k retirement plan and also offer matching contribution, you should invest at the minimum to obtain the contribution from the company. They are considered “fringe benefits” because they are considered below the line expense item in the company’s balance sheet. This benefit is hidden from employee compensation package. If the employees don’t use it the company will just take it away. If possible, budget permitting, try to invest the maximum allowed by the IRS.
  2. Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement.  You will need to open an account and buy “shares” of the Roth IRA. The difference between Roth IRA and traditional IRA is you have to pay taxes when it is invested. You don’t have to pay taxes when it is time for retirement. Roth IRA and IRA are no offered by the companies that you work for. This type of investment can only be purchased through banks and investment companies. There are certain conditions that must be met for anyone to qualify under IRS rule.
  3. Traditional IRA is the next best thing. It is very similar to Roth IRA but the only difference is you will have to pay taxes when retirement comes and you have to sell it. The amount of tax depends on the amount of value of the IRA and the tax bracket when it is your retirement age. It could go both ways. There is a likely chance that the tax could be in your favor or you will be stuck with a high tax bill. Traditional IRA is available for everyone but not Roth IRA.
  4. The Exchange-Traded Funds (ETF) is also considered index funds, is basically a collection of a list of company stocks. It is also very similar to Mutual Funds but there are some fundamental differences. ETFs can be traded in the open market and most if not all ETFs pay quarterly dividend, which is a passive income. The major difference between ETFs and equity stock is the risk is lesser. The likelihood of ETF’s value drop to $0 is minimal while individual stocks could be easily wiped out depend on market condition.
  5. Company stocks which is also called equities is a lot riskier than bonds. The return generated from stocks are usually higher than bonds but they come with inherent risk of volatility. The movement of stocks depend on market conditions. However, history of stocks have been showing a lot more ups and downs. There are stocks that pay dividends on a quarterly basis while there are some stocks don’t. This is where I find investing in stocks appealing. I consider investing in stock to legalized gambling. You have to pick the right hands to win or you could lose all.
  6. My preference to stocks over bonds is because of their higher return. I would consider bonds to be a longer term investment. If you are still young, you may want to invest a small percentage in bond to ensure that you have a diversified portfolio. The bond will continue to grow and hopefully by the time you retire there is a large sum of money waiting for you. As you close to retirement, you would move a larger percentage into bonds to minimize the volatility of stock market.

There are other investment vehicles that I would not be discussing here as this will require a lot more than a blog. The recommendation that I proposed above should be considered closely by all because it is a start for a better future. The market condition today is ripe for the taking and history suggests that it will continue to go up. So don’t wait and start investing. You may ask where to come up with the money to start investing. Subscribe to my blog because this will be my next subject: how to save enough to begin investing?