31 Top-10 investment questions answered
Welcome to the Financially Free Journey podcast where I aim to dispel the seemingly complex topic of personal finances, money management, debt, savings, investing and even retirement. This podcast is designed to help you feel empowered by increasing your knowledge so you can flex your money muscles!
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Todays’ episode is all about answering the most common top 10 investing questions!
#1 What are blue chip stocks?
This is a great question because the phrase “blue chip stocks” is widely used but some people may not know exactly what that means. Blue chip stocks are stocks from public companies that have great reputations and people usually know who the companies are like Berkshire Hathaway or Facebook. To be a blue-chip stock the company has consistent success that deliver positive returns to its investors over time. Blue chip stocks are typically considered safe bets when you are looking at investing in equities but don’t be fooled into thinking they can’t fail. You have to remember that you are still investing in equities and there is always risk, regardless of how successful the company is.
#2 What is Day trading and is it for me?
Day trading is essentially exactly what it sounds like. You buy stocks and then you sell the stocks in the same day. The way that day traders make money is typically by investing large sums into stocks and then taking advantage of small swings in the stocks price. The profit that they make is the spread between what is cost them to buy the stocks and what they sold it for. The primary goal of a day trader is to turn a quick profit when it comes to their investment strategy. Day trading is risky business and definitely not for the faint of heart! This is definitely not the right investment strategy for someone just starting out with investing and don’t be lured in by turning a quick profit. If it was easy, everyone would do it.
#3 What is hedging?
Hedging can be looked at as a way of buying insurance on your investments. One of the ways that investors hedge their investments is by buying derivatives which are investments that are designed to balance risk. Investors typically put some of their money into derivatives to balance out the risk of their portfolio. If risk is something you are concerned about, this is definitely something you should talk to your investment professional about.
#4 I have outstanding student loans. Should I pay off my loans in full or start investing?
I can only answer this question as to what I personally believe to be the best option. As for me, I think investing now instead of later would be the best option. You have to remember that when it comes to investing, time is money. Your money that you invest will compound, meaning the initial invested funds and gains grow exponentially over time.
Really, this is a personal decision though because paying off any debt and specifically student loan debt can be extremely rewarding because debt is not only financially draining but physiologically draining as well. I am a huge advocate for paying off debt and if your mission is to be debt free, perhaps not being side tracked by investing is the best thing for you to do. You really need to weigh and measure both options and come up with the decision that best suites your long term goals and how the debt is impacting you.
#5 I keep hearing that I need to “diversify” my investment portfolio. How do I know how much I should put in stocks vs bonds?
This is a great question and the answer is going to be different for everyone. First off, it’s important to keep in mind the phrase “don’t put all your eggs in one basket”. You want to make sure you have your money spread out over the market and invested in things that don’t all move up at the same time or down at the same time. This will help protect you from systematic risk in the market. The other aspect to think about is that you need to think about your overall investing objects and the timeframe you have for investing the funds. An easy way to think about it as well is the longer the time frame you have and the more comfortable you are with risk, the more risk you take by putting more of your money in equities. If you are getting closer to retirement and you don’t feel comfortable waking up one day to your portfolio being down by 20%, you probably should look at a higher percentage of your funds being investing in things like bonds. Overall, I do have to say that of course…talk to a financial advisor and get their take on recommendations according to your specific situation.
#6 I really want to start investing. Should I look at picking individual stocks? If so, how do I decide what stocks to pick?
Right now everyone is interested in the market. People who have never had interest in investing ever, are wanting to become day traders and play the market. The market has run record highs and been bullish for a very long time. With this years overdue correction on top of COVID, we are now seeing stocks at a major discount so I receive this question a lot through social media.
The short answer…NO! Here’s the thing, unless you really understand how to look at a company financials and can determine if the company is in a good financial situation, you should be looking at things like index funds. Depending on the fund you choose, Index funds give you exposure to thousands of companies across the globe and you are able to participate in the overall market increase and you don’t have to take major risk on individual companies. As Warren Buffett has stated, don’t invest in things you don’t understand. It can be very dangerous to hop on the individual stock train because companies can have bloated stock prices based off of their true value.
#7 How much of my income should I be investing?
As a general rule of thumb, you should be saving a target of 20% of your salary. This includes your retirement contributions, liquid savings contributions as well as investing contributions. Now, again the answer to this questions varies depending on your overall income, debt level and timeframe for retirement.
I have to preface that eliminating high interest debt is first and foremost step number one before investing. After that, make sure your living expenses are in line to allow yourself additional funds to save. From there you need to ensure you have an emergency fund saved and set aside that is fully liquid. Now you may be tempted to invest this money but you have to keep this set aside for emergencies and be ok with the fact that your not going to earn a ton of interest on it. Keep it in a savings or high yield account so you can access it at anytime. The emergency fund should be at least 3 months of living expenses and if your self employed you should have a little more than that. Now, assuming you have done everything I just talked about, you need to automatically deduct at least 20% of your income to go directly into your investing account to set yourself up for financial success.
#8 What is the minimum amount of time I should plan on keeping my money in an investment for?
This is a loaded question. Again, it really depends on your specific situation but I can speak to some generalizations. If you are going to invest funds, you need to really plan on not accessing those funds for at least 3-5 years. This will give the investment time to ride out any up’s or down’s in the market and give you a good return on your money.
#9 How do I know when I should sell stocks I’m invested in?
Ok, so the age old adage is “buy low and sell high”…but a lot of you want to know what that means exactly.
I mentioned earlier that we are seeing a lot of stocks at a discount. What does that mean exactly? Think about it this way, you go to the store and see your favorite name brand shoes on sale for 30% off. That’s exactly what is happening in the stock market right now. We have seen a major correction in the evaluation of companies. If you are looking at the financials of some of these companies, they are still financially strong and a good buy. That means right now is a great time to buy those stocks at a discount. These are companies that you have dug into their financials and you can see that they are in a strong position and are likely to rise again in their value.
Make sure you set a target and stick to your plan. Once the company has risen in value, you simply sell the stock. Make sure to stick to your plan and don’t get greedy.
#10 What are some investing red flags?
I love this question. The top red flag is if it seems too good to be true, it probably is. Also, if you are told that there isn’t any risk…beware. Investing in inherently risky and all investment options have their own risks attached to them. I would skip on an investment where I am told that it is “risk-free”. I mentioned this earlier but if you don’t understand an investment, you probably should not do it. Think of it this way, if you can’t explain the investment and how it works to a friend, it is not something you should invest in. Something that has been happening more frequently is investments that require you to “refer a friend” in order to make money. If you are presented with anything like this, run the other way. True investments do not require you to refer other people or recruit people in order for you to make a return on your money.
WOW- We covered a ton of information and I hope this episode helps you become more comfortable with investing and taking that next step on your money journey.
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Until next time!