What is diversification?

In investing diversification is simply having multiple assets within your portfolio. If you are invested into a mutual fund it takes care of diversification for you because a mutual fund is broken down into multiple assets all within one fund. I like to remind myself of diversification by the quote “don’t put all your eggs in one basket”. An example of putting all your eggs into one basket would be to invest all your money into one single stock. The reason you should consider not investing your entire portfolio into one stock is because it increases your risk. If that one stock fails and crashes by 50% then you just lost half of your portfolio. If you are well diversified your portfolio might consist of ten stocks or twenty stocks. If you are well diversified and one of your stocks drops by 50% your portfolio won’t suffer as much.

Why a diversified portfolio wins

“Experts recommend a diversified portfolio of low-index investments like index funds that track the market. Diversifying reduces the risk that the performance of a single company will affect your ability to reach your financial goals.” -Sam Becker (Acorns)

Acorns

Sam Becker

“Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest.” Compound interest has been identified as Einstein’s eight wonder of the world. The longer you allow compound interest to work for you the greater it’ll pay in the end.

Example

If I were to ask you if you would rather have one million dollars or a penny that doubles every day for thirty days which would you choose? If you hadn’t heard this before you might say it’s foolish not to take the one million dollars. However, if you understand how compound interest works this example can work in your favor. You see, a penny that doubles for thirty days begins with a slow start. On day two you would have 2 pennies, on day five you would have 16 cents, and on day ten you would have accumulated a little over 5 dollars. With only twenty days left to double your money it doesn’t seem like you’ll ever get anywhere near matching the one million dollars. If you trust the process compound interest will begin to work its magic. On day fifteen you’d make a significant jump to $163.84, on day twenty that number grows to $5,242.88, and on day twenty-five your doubled penny would grow to $167,772.16. In this example, you can begin to see how compound interest works, but you might be looking at these numbers thinking the one million dollars is still greater than the amount accumulated by day twenty-five. The doubled penny doesn’t become greater than the one million dollars until day twenty-eight where it reaches $1,342,177.28 and by day thirty it becomes more than five times more the initial one million dollars for a total of $5,368,709.12.

Summary

Just as in the example above compound interest works with investing the same way. When you first get started it seems like there is no movement at all and you may even begin to ask yourself why you even started investing in the first place; however, if you stay the course and trust the process compound interest will work wonders for you over time.

https://en.wikipedia.org/wiki/Compound_interest

This a question I get a lot from many millenials. The idea of investing can sound intimidating if you don’t have any experience; however, there are several ways to begin investing. Today we’ll be focusing on three different ways you can begin investing today. (Roth IRA, 401k, and stocks)

Roth IRA

A Roth IRA is an individual retirement account that has many tax advantages. Roth IRA’s allow individuals to invest after-tax money and allows individuals to contribute up to $6,000 every year. Investing after-tax money allows your money to grow tax free and the earlier you begin investing the more you can take advantage of compound interest. One disadvantage of the Roth IRA is you can’t take advantage of your tax free growth until the age of 59. If an individual accesses their money in a Roth IRA they may be penalized.

401k

A 401k is a company-sponsored retirement account. Some companies offer 401k plans, but not every company does. It is important that you understand if the company you work for offers a 401k plan because many companies will provide a small percent match on what you contribute. This means your company will double a small amount of the money you contribute. Unlike the Roth IRA the 401k allows individuals to invest up to $18,000 per year and if you are over 50 you are allowed to invest up to $24,000 per year. One downside of the 401k is that you are limited to fewer investment options.

Stocks

A stock is a small percentage of company. Investing in stocks can be tricky because there are a myriad of stocks to invest in. With the technological advancements we have today it makes investing in stocks a lot easier than it was decades ago. Today, you can simply invest from your phone. A few apps to consider to get started investing in stocks are Robinhood, M1 Finance, and WeBull. These three apps let you pick which stocks you invest in. Unlike the Roth IRA and 401k individuals aren’t penalized for withdrawing their funds; however, picking individual stocks can be considered the most risky of the three.

Conclusion

In conclusion, you should do your own research before you begin investing to provide yourself the best advantage to allow your money to grow. Depending on your age and your financial situation should impact the investing choices you make.

My name is Emanuel Morgan and this blog is for the new investor that is just getting started, the investor with little experience, or the investor that wants to expand their knowledge. Investing can be a tricky topic and frightening if you don’t know what you are doing. Today we’ll be focusing on why you should begin investing.

There are many reasons to begin investing, but I’ll name a few to get you started. You should begin investing to help accomplish your financial goals, create wealth, and beat inflation.

Accomplish your financial goals

Investing can help you reach your financial goals by allowing your money to work for you. Investing creates the opportunity for an individual to work smarter, not harder. When you invest your money you create the opportunity for yourself to earn dividends, interest, and capitalize on short-term and long-term gains. Before investing it may be a good idea to ask yourself what your financial goals are. This can help you decide which investments are best for you and how aggressive you want to be. Begin by asking yourself where you currently are financially and the ask yourself where you want to be in one, five years, and ten years. By understanding where you currently are you can create a more accurate picture of where you want to go.

Create wealth

Creating wealth can provide both safety and security for unexpected life expenses that occur. If your car broke down today and you needed $1,000 to get it repaired could you afford to get it fixed without going into debt, or borrowing money from friends or family? The earlier you began investing is the key creating wealth because of compound interest. “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it” -Albert Einstein.

Beat inflation

The U.S. dollar continues to depreciate every year and this is due to inflation. A dollar today can’t buy as much as it could’ve ten years ago. Inflation runs an average of approximately 2% every year. This means if you are just saving money in a savings account you are actually losing money each year due to inflation. Investing creates an opportunity to beat inflation. For example, on average the stock market returns 8-10% and if you account for inflation you still put yourself in a position to potentially return 6-8% each year.

Conclusion

Investing involves taking risks that could result in a loss of money; however, not investing could also put you at risk to take a loss on your money. There are many reasons to begin investing. If you haven’t started investing the best thing you can do is begin to educate yourself by reading posts like this and when you are ready begin to invest a small amount that you feel comfortable with as you continue to learn and grow as an investor.

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