An idiots introduction to assets and investing. Who, what, when, where, why, and how part 1

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WHO YOU!!!

WHAT There are many ways to look at investments. Investments as related to finance include buying securities in the form of stocks or bonds. When buying stocks and bonds you can buy them in the form of common shares, mutual funds and exchange traded funds.

Shares are the easiest to understand because you buy a “share” of a company, you pay a commission to a brokerage and put in an order to buy a share at a certain price. You then pay the brokerage to put in a n order to sell the share at a certain price. To make money, obviously you buy low and sell high. That is the trick to all things in investment.

In a mutual fund, you buy a piece of a fund which is a grouping of stocks and bonds that someone who controls the fund, known as the fund manager. The price at which you buy a mutual fund is known as the NAV or the net asset value. This is the value of the entire set of stocks and bonds in the fund minus the value of its liabilitites. The beauty of a mutual fund is that it is actively managed by supposedly knowlegable individuals so if you buy a mutual fund, you could potentially just stick with it till you retire or whenever you want to leave the market. The bad news about it is that it is actively managed, meaning that there are some costs behind a mutual fund, because the fund manager has to make some kind of money from controlling your money for you. When you buy a mutual fund, you don’t normally pay a commission to buy into the fund (if you buy a no load fund). A load can be a front load meaning you pay money when you buy into the fund as a fee or a back end load meaning you pay a fee when you leave the fund. A no load means you don’t pay any fees when you buy in or sell out. Another way mutual funds make money for the fund manager is the yearly maintanance fees which can range from less than half a percent of your assets to a couple of percent of your assets. Your ultimate goal is to buy a good performing mutual fund with no load and low maintenance fees.

A way to get around most of the flaws of a mutual fund is what is known as an ETF. An exchange trade fund in its purest form is a passively managed index of stocks. If you want to follow the S&P 500 index, there is an ETF for you. If you want to follow the Russell 2000, there is an ETF for you. In most cases, you don’t pay a load but you buy an ETF like you would buy a “share” of a stock. You buy a “share” of the index thus you pay a commission to buy and a commission to sell. There is also a yearly fee for an ETF but is much less than the cost of a mutual fund. Vanguards total market SP500 ETF has a fee of 0.07 percent of assets. This is much less than what you would pay for an actively managed mutual fund. Another pro of an ETF is that there are tax advantages to owning an ETF. In a mutual fund, if the fund manager sells a stock, they pay the tax that is passed on to you. In an ETF because you are buying an index like you would with stocks on an exchange, there aren’t any taxable gains that are passed off to you while you hold the ETF.

Motley Fools guide to investments
Mutual fund basics
ETF basics

WHEN and WHY I was watching Cramer on CNBC last night and Tim Russert was on with his son and he said something that hit home…the most important thing in life is time, because you can always have more money, you can make money and you can lose money but once you give your time, it is gone forever. For investments, the power of compounding can help to create wealth.

This also reminds me of my dad, he is the type of person who prefers to have his cash on hand. Putting money under a mattress is probably one of the worse things you can do for your money because the value of you money goes down over time due to inflation.

The bottom line is that the earlier you invest, the more money that you will end up with when you retire. So you ask, why do i need to think about retirement! I’m only 20 something years old and its so far away! Well, you need to save for retirement at some point so why not early? You may also ask, well..i’m just a resident making 40 grand a year, I don’t have any money to invest and I don’t want to live like a bum. Anyway, I’ll be making a ton of money as an attending anyway. Well…you could think like that but again, I’m just teaching you how to maximize your returns. There are basic things that you need to live on and basic things that you may want to have during your residency or early years in your career. Just cut out the fat and invest the rest and you’ll actually feel better about your financial situation. I actually have a small smile when I see that my portfolio is growing. Its also nice to know that I’m learning about the market with my small amount of money so that when I do make a lot of money, I can be a more learned investor.

Compound interest calculator 1
Compound interest calculator 2

WHERE and HOW to be discussed in the next segment.

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