Where should you invest your money and how do you vet the losers - (W8:D1) Debt Free Millionaire

Debt-Free Millionaire

Simplified Explanation: Like buying a personal home, you will find opportunities to buy houses at a low price

Real Life: Investments are a must learn for most people but the truth is most Americans should diversify their money into many different funds (such as mutual funds) and sit on it for 10+ years. Most advisors will tell you they can get you a better return, but you have mutual funds available to the public that, over 10 years, will give you a 20% ROI (Return on Investment) every year so moving it around is just adding more risk instead of keeping it in one location. On Week 3, Day 4 (W3: D4) we listed out the most common investments you could invest in but now we will get a little more into investing of individual stocks.

Disclaimer: This is not financial advice on how to invest but information about investing as an educational study. Here are things you may want to know before you start buying stocks:

1. What are investments – Investments are buying ownership in a company or mutual fund. By you buying any investment you are paying for a portion of that company or fund and asking for a return on that investment. Investing in individual stocks is just one way to invest your money. Here are a few ways before we get into more details about each:
   1. Individual stocks - An individual stock represents ownership in a single company, entitling the shareholder to a proportional share of the company's assets and earnings. When an investor purchases shares of an individual stock, they are essentially buying a small piece of that company. The value of the stock can fluctuate based on various factors, including the company's performance, market conditions, and investor sentiment. Individual stocks can be bought and sold on stock exchanges, such as the New York Stock Exchange (NYSE) or the NASDAQ, providing investors with the opportunity to potentially profit from the success of specific companies. However, investing in individual stocks also carries risks, as the value of a stock can decline, leading to potential losses for investors.
   2. Mutual Funds - A mutual fund is a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Managed by professional portfolio managers, mutual funds offer investors the opportunity to access a diversified portfolio of assets without needing to purchase individual securities themselves. Investors buy shares in the mutual fund, and the fund's value is determined by the performance of the underlying assets it holds. Mutual funds are designed to spread risk across a variety of investments, reducing the impact of any single security's performance on the overall fund. They are commonly used by investors seeking diversification and professional management of their investment portfolios.
   3. Bonds - Investment bonds, also known as bonds or fixed-income securities, are debt instruments issued by governments, municipalities, corporations, or other entities to raise capital. Investors purchase bonds, effectively lending money to the issuer in exchange for periodic interest payments, known as coupon payments, and the eventual repayment of the bond's face value, known as the principal or par value, at maturity. Bonds typically have a fixed interest rate and specified maturity date, offering a predictable stream of income and considered relatively safe investments compared to stocks. However, bond prices can fluctuate based on changes in interest rates, credit ratings, and market conditions. Investors may choose to invest in bonds for income, capital preservation, diversification, or as part of a balanced investment portfolio, with bonds commonly traded on bond markets through brokers or financial institutions.
   4. Private Companies - Ownership in a private company refers to having a stake in a company that is not publicly traded. Unlike publicly traded companies, private company ownership is typically limited to a smaller group of investors, founders, or venture capitalists. It grants individuals or entities rights such as voting privileges and a share of profits, but is less liquid and not easily traded on an open market.
2. Living vs Retirement investing - Some of these options are for monthly living expenses (individual stocks) and some grow over time (mutual funds, bonds, and private companies). Consider how soon you want to use your money and buy accordingly. The sooner you want a return, the more risk you will be taking.
3. Stockbrokers yesterday, today, and tomorrow

In the past people have invested with a stockbroker, recently its been through a stock broker website, now it is being done completely on an app on your phone. The same has changed for fees as well. In the past you paid a broker a good amount of your return for them to invest it, prices dropped as the visual broker went away and online trading became popular, and now there is almost a price war among brokers trying to win you as a client. They have dropped fees to nearly $0 per trade with apps like Robinhood.

1. Broker Strengths and weaknesses - Different brokers have different strengths and weaknesses and fees they charge, look up reviews online and sit down to meet with them before setting up an account. Weigh the pros and the cons.
2. Diversification in your investments - Never invest all your money in one stock or company ever. There is too much risk that something could happen, and it be worth $0. Diversify your portfolio means spread your money out. Investors know this that 10 may fail but if one hits it big, it will eat up all the other loses and you will still make a lot of money if you choose correctly. Most of the time, a diverse selection of stocks and companies won’t all fail at the same time, minus a recession usually makes all prices fall, which is why you need to consider your risk tolerance and ability to get back up and not see yourself as a victim. If you are resilient in life, you are more likely to have a higher risk tolerance.
3. Mutual Fund Diversity - A mutual fund is diversifying because it is usually built as a fund of many individual stocks, bonds, and commodities and if a certain value goes down, others may go up which means less of a loss during a recession.
4. Balanced Portfolio - Diversifying in competing stocks helps balance your portfolio. You should think of having a mixture of recession-friendly sector investments such as staples, utilities, and health care. They don’t have the best returns during boom times in the market, but they also don’t go down because they are essential. Essentials normally stay steady during recessions because they are always needed. Retailers such as Amazon and Wal-Mart stay stead or go up during recessions when people have to shop for cheaper options. Look for stocks that give a reliable dividend, real estate is a good investment after the price settles down low. Precious metals increase during times of recession and slowly decrease as times get easier and people adjust their holdings to go after more lucrative investments. Invest in yourself during a recession; take your money and put it into your education during a recession. Education during a time of high unemployment will get you through any rough economy and make you ready to be hired when the recession ends and businesses are looking for new blood (employees).
5. Dividends - Most stocks pay you dividends, excess money, each year, without you having to sell your stock. Most people invest this money back into the company with more stock or keep it for your living expenses. Though if the economy turns, there will be no dividend that year and this is why you should have other income through a full-time job just to make sure you can feed you and your family. Look also at how a company/stock pays dividends, finding those who show a strong history. Also know that they can hold back on paying dividends in time of recession to give the company more funding.
6. Recessions Happen - Considering recessions happen every ten years, investment values drop for two to three years afterwards slowly creep back up to before recession levels and higher, then when you get older you are advised to rebalance your portfolio to be less risky, consider this new approach. Most financial planners want you to change your portfolio to be as risk averse as possible in your later years. Instead, try planning out your next 10-12 years between each market adjustments, starting in the middle of each recovery, how much money will you need? Rebalance that amount of your investments into low risk investments while keeping the rest in high risk mutual funds with a history of high returns over 10 years. If you do this, the next 10 years of money you need will not fluctuate too much while the rest will be able to climb to new heights and though it may drop during the next recession, history has shown that it always comes back after the recession and when it comes back it shoots well past its last peak value. This way your investments continue to climb as you grow older and the hope is that you never go without the funds you need to survive.
7. Lookup Their History - All established investments have a history, look at the history of the stock or mutual fund. Make sure that they show a steady incline over the years. Mutual funds will likely give you a 1, 5, and 10 year history of their average ROI interest rate they have returned. Those that are the most steady increase dramatically over the years and even if a few stocks drop in their investment, the rest of the investments will potentially increase keeping the fund portfolio solid and growing.
8. News Affects Values - Consider the news when considering individual stocks. When you buy stock, make sure you are informed about their latest news. If they are hiring, this is a good sign for expansion and increased values, if they are being sued, this will return with a lower value for their stock. If a pandemic happens travel stocks will fall yet retailers who allow for shopping online will likely grow. Learn before you buy what to look for in the news so you can be the first to buy when something good happens and first to sell when something negative happens.
9. Strengths and Weaknesses in Stocks and Investments - Each company and mutual fund have their strengths and weaknesses. For companies they have their strengths in potential for growth while mutual funds have potential in the individual investments in that fund. This is all public knowledge so look at what they are investing in and see if you think those are good investments. Remember though, that they have a 10-20 year history that you can check and they are good at what they do.

Debt-to-Equity Ratio: One weakness could be their debt-to-equity ratio or those companies that are still in a great deal of debt compared to their equity in their own company. To find this number, divide the total liabilities on the company balance sheet by the total amount of shareholder equity. For those with a lower risk tolerance, that number should be 0.3 or less.

Price-earnings ratio (P/E Ratio) shows how well a stock’s value is doing compared to their earnings. This will tell you if they are undervalued or overvalued. To find this ratio, divide the company's share price by its earnings per share. If a company is trading at $40 per share and the earnings per share are $2.50, the P/E ratio is 16. Use this to investigate similar companies. The lower you the ratio means the more the earnings are increasing. Know that a stock with a 16 ratio can be good when you compare it with other companies. It all depends on how the economy is doing at that time.