Episode 14.
Investment Basics (Part 2)

Question:

Key Points:

• Listen to Part 1 if you haven't already
• Traditional bonds have a coupon amount of $1000, but "baby bonds" have a coupon amount of only $25
• Stocks are considered the riskiest investment because you don't have control over your investment
• Stocks on average generally go up, but eany individual stock may not go up
• Most financial professionals advise diversifying, which means spreading your investment over multiple stocks
• There are traditional mutual funds, which have a manager who actively picks stocks. These often have more of a "load" (meaning a fee)
• There are also "index" funds where the fund mimics a specific index. This usually has much lower management fees and the return is more predictable
• Bond funds are generally considered less risky than stock mutual funds
• To determine the compound interest amount, multiple 1.XX, where XX is the interest rate (e.g. 1.06 for a 6% interest rate), times 1.XX times 1.XX for however many years (e.g. 1.06*1.06*1.06 for 6% interest for 3 years)
• $100 of something today would cost ~$150 after 15 years, assuming a 3% inflation rate
• A 3% CD would turn $100 into the same ~$150
• At 6% interest, $100 would turn into ~$250 in 15 years
• At 9% interest, $100 would turn into ~$350 in 15 years
• Over time, stocks are much more volitile, but likely to provide a better return, especially if you are going to have it invested for at least 7 years and even more so if over 10 years.
• Alyssa chose to put money in a CD; Malachi decided to put his money into something with bonds
• There are two perspectives on doing well in the stock market by removing risk
  1. Diverify because you don't know what is going to happen in the stock market
  2. Warren Buffet says, "put all your eggs in one basket, and watch that basket". i.e. Savvy investors put money somewhere they know is going to do well rather than spread out your money