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financial_advice [2015/10/09 07:00] – [Questions to Help You Understand Investment Basics] hpsamiosfinancial_advice [2020/06/02 14:22] (current) – external edit 127.0.0.1
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 ====== Background ====== ====== Background ======
  
-Moving from country to country as I did in my adult years meant that I had to worry about saving and investment in a lot of countries. This meant in particular I needed to figure out a way to investment money. Coming from Australia the best place to "put your money" is real-estate. While a lot of money can be made that way in the US, there were other places such as the stock market that pulled. +Moving from country to country as I did in my adult years meant that I had to worry about saving and investment in a lot of countries. This meant in particular I needed to figure out a way to invest money for the future. Coming from Australia the best place to "put your money" is real-estate. While a lot of money can be made that way in the US there were other places, such as the stock market, that pulled. 
  
-I set out to find out about the stock market. This is the distilled set of thoughts I have as of today on how to invest in the stock market. Its based on the books below and is the information I wish I had of had when I first arrived in the US.+I set out to find out about the stock market. Below you will find the distilled set of thoughts I have as of today on how to invest in the stock market. Its based on the books below and is the information I wish I had of had when I first arrived in the US.
  
-But there is a little more. The kids are getting to the age where they need to start assuming responsibility for their financial health. Rather than just trot out the advice to the kids any time they'd listen to us, I thought we'd try a different approach. On the kids birthday or christmas event when we didn't feel like the gift list was particularly inspired, we work with the kids set up an investment account and then seeded it with a small amount of cash to allow them to "buy something." But before they got the gift, they had to sit down and answer a set of questions to help them understand how to think about investing and what might work for them. In particular, the questions were there to help them discover why they should start an investment strategy early, like right now. Below are the questions we gave as "homework" on the relevant birthday. +But there is a little more. The kids are getting to the age where they need to start assuming responsibility for their financial health. Rather than just trot out the advice to the kids any time they'd listen to us, I thought we'd try a different approach. On the kids birthday or christmas when we didn't feel like the gift list was particularly inspired, we work with the kids set up an investment account and then seeded it with a small amount of cash to allow them to "buy something." But before they got the gift, they had to sit down and answer a set of questions to help them understand how to think about investing and what might work for them. In particular, the questions were there to help them discover why they should start an investment strategy early, like right now.
- +
-I publish this because other parents have expressed an interest in helping their kids, and some parents would like to understand more about investing in general.+
  
 +Below are the questions we gave as "homework" on the relevant birthday / event. The list is basically copies of the emails we sent to the kids. I publish this because other parents have expressed an interest in helping their kids get started in preparing for the future.
 ====== Questions to Help You Understand Investment Basics ====== ====== Questions to Help You Understand Investment Basics ======
  
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   - What is a quick way to figure out how long it would take to double your money given a particular rate of return? For example, how would I quickly figure out how long it would take to double my money given the rate of return is 7% per year? (Hint: answer has something to do with the number 72)   - What is a quick way to figure out how long it would take to double your money given a particular rate of return? For example, how would I quickly figure out how long it would take to double my money given the rate of return is 7% per year? (Hint: answer has something to do with the number 72)
   - You are given the choice of 2 investments. One is expected to return 10% per year, while the other returns 9.5%. Because of the better rate of return for the first investment, the manager of that investment charges a small 1.25% fee on the amount of money that he is managing. Over 40 years, which investment should you choose? What is the difference? Why?   - You are given the choice of 2 investments. One is expected to return 10% per year, while the other returns 9.5%. Because of the better rate of return for the first investment, the manager of that investment charges a small 1.25% fee on the amount of money that he is managing. Over 40 years, which investment should you choose? What is the difference? Why?
-  - A measure of the performance of the stock market is the S&P 500 index. You can get this performance simply by investing in a index fund or exchange traded fund that tracks the performance of the S&P 500. If you did, based on history, you would get about 10% return. Professional money managers need to outperform the performance of the S&P 500 to be considered any good. Warren Buffet has managed to do this. Some questions:+  - A measure of the performance of the stock market is the S&P 500 index. You can get this performance simply by investing in a index fund or exchange traded fund that tracks the performance of the S&P 500. If you did, based on history, you would get about 10% return. Professional money managers need to outperform the performance of the S&P 500 to be considered any good. Warren Buffet has managed to do this year after year. Some questions:
     - How much has Warren Buffet out performed the S&P 500 by?     - How much has Warren Buffet out performed the S&P 500 by?
     - What percentage of portfolio money managers beat the performance of the S&P 500? What does this tell you about investing?     - What percentage of portfolio money managers beat the performance of the S&P 500? What does this tell you about investing?
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   - The year is 2008 and the financial markets are in turmoil with the S&P 500 going down by 38%. Wow! Its a crash. Everyone is saying "sell", "sell", "sell", you can feel the panic around you and see the results as each day the stock market goes lower. You don't need the money and won't need the money for the next 10 years or so and so don't have need to sell. But you still have a choice - do you sell now and cut your losses or just leave the money in the in the stock market. Why? If you sell it, where would you put the money?   - The year is 2008 and the financial markets are in turmoil with the S&P 500 going down by 38%. Wow! Its a crash. Everyone is saying "sell", "sell", "sell", you can feel the panic around you and see the results as each day the stock market goes lower. You don't need the money and won't need the money for the next 10 years or so and so don't have need to sell. But you still have a choice - do you sell now and cut your losses or just leave the money in the in the stock market. Why? If you sell it, where would you put the money?
  
-Note: For questions 1 and 4 [[http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php|this calculator site]] might help.  might help.+Note: For questions 1 and 4 [[http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php|this calculator site]] might help.
  
 ====== Investment Books ====== ====== Investment Books ======
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 ====== My Approach ====== ====== My Approach ======
  
-You might be wondering what approach I take in investing in stocks as a result of all of this. A lot of this section is also a response to what I know about my psychology as is there in place to help me not do stupid things. +You might be wondering what approach I take in investing in stocks as a result of all of this. A lot of this section is also a response to what I know about my psychology I've put it in place to help me **NOT** do stupid things:
- +
-Basically this has lead me to a core set of approaches and beliefs:+
  
   - Stocks are the best place to put most of your money, especially if you have a long (> 7 year) investment horizon   - Stocks are the best place to put most of your money, especially if you have a long (> 7 year) investment horizon
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 Good luck! Good luck!
  
 +{{tag>Finance Learning Personal}}
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