Investing

There are many different investments available to help you achieve your ideal life. At a simple level, they can be grouped as follows:

• Cash

• Bonds

• Stocks

Cash is good to have on hand to pay for your bills and lifestyle for the next 3 to 6 months. 

Bonds (also called Fixed Income sometimes) are good to have on hand to convert to cash as your life continues. Bonds are typically less volatile than stocks and allow your stocks to grow over the long-term. 

Stocks (also called equities sometimes) are good to have to help you generate the returns that you need in order to fund your ideal life. 

Before investing, make sure you have taken care of the following:

1. Paid off all high-interest debt or at least have a game plan on how to get it paid off.

2. Make sure you understand your cash flow. Your cash flow should be after you have contributed to your employer-sponsored retirement accounts (usually 401k or 403b account). Make sure you are contributing up to at least the employer match. Make sure you get this invested in the stock market for the long run so it has time to grow for you. Have it invested in a mix of low-cost index funds that invest in the US market and Non-US market. Or you can invest in a global fund that invests in both the US and Non-US markets. There is no perfect answer on how much should be in US market or Non-US market. Some have 100% in the US market, others 70%, other 50%, etc. It depends on your risk tolerance and how you view the world. 

3. Make sure you have enough saved in your emergency fund (this can be a checking or savings account at a bank or it can be an investment account that is investing in a money market fund if you like) for the next 3 to 6 months of living expenses. Keep this in a money market fund that earns a yield, but still has liquidity in case it is needed. 

4. If you know of upcoming expenses or big ticket expenses that are coming in the next couple years, keep those in liquid funds as well, not in the stock market.

5. Consider contributing to a Roth IRA and getting it invested similarly to what is mentioned in item 2 above.  Double check income limits and also make sure you have at least as much as your contribution in earned income for the year of the contribution. It does make sense to consult your financial advisor, financial planner, and/or CPA to make sure you follow all the rules.

6. Once you know how much you can save after the  items above, transfer that remaining amount on a recurring basis into a taxable brokerage account and get invested in low-cost index funds. Similar to what was mentioned in item 2 above, have it invested in a mix of index funds that invest in the US market and Non-US market. Or you can invest in a global fund that invests in both the US and Non-US markets. Depending on your personal preferences and risk tolerance, you might want to invest in some real estate funds as well (REITs). 

7. If you are in retirement, you want to make sure you have 3 to 7 years of funds in either a money market fund or bonds or bond funds. You need to understand your cash flow to understand how much you will need for 3 to 7 years. The 3 to 7 years varies on your personal preferences and amount of risk you are willing to take. If you are comfortable with more money in the stock market, lean towards 3 years. It depends for every person, there is no one right answer. 

Helpful tips and reminders:

• Most investors will underperform the general market becuase of trying to pick individual stocks and time the market. Stay disciplined and stay invested for the long-run in low-cost index funds. This is boring, but helps you achieve the returns you need to live your ideal life. 

• Know that there are going to be good days in the market and, more importantly, there are going to be bad days in the market. Don't stress or worry when there are bad days. When there are bad days, go ahead and invest more into stocks if you have available cash because it means you are getting it at a discount to what it was before. Stay focused on the long-term. 

• Don't focus on your investment returns on a daily basis, it will just stress you out. 

• Rebalance your portfolio once a year at a minimum. If you use up some of your bonds to fund your life style and you now do not have at least 3 years worth of spending in bonds, sell some stocks and put those proceeds into bonds. Likewise, if you have too much in bonds, sell some of them and put the proceeds into stocks.

• The news is there to entertain you so that the news companies can continue to generate ad revenue. It isn't there to truly inform you. If you ignore the news most of the time, you will be better off. Don't let the news influence your investment decisions. Stay invested for the long-term and don't try to to time the market. There will always be something on the news to worry or scare you. 

• Over the course of 30 years, missing the best 30 days in the market can lose the majority of your returns. Don't try to market time. Stay invested for the long-term and continue to invest as you can. 

• Investing is not the same as gambling. Picking individual stocks and trying to time the market is more similar to gambling than investing. 

  • Set aside a small portion of your assets for stock picking (aka gambling), but don't do it with the majority of your assets. 

• If you are focused on the short-term, you are most likley gambling. If you are focused on the long-term, you are most likley investing. 

• An investment that is worth less than you bought it for is only a loss if you sell it. If you give it time to go up, it most likely will go up (this works better for low-cost index funds that are invested in many different companies; there are plenty of times where individual stocks will go down in value and never come back up). 

• Don't be afraid of new all-time highs in the market. We are expecting for all-time highs to continually happen as time goes on. That is what we want from our stocks. 

• The market goes up and goes down no matter who is in office, don't let politics influence your investing for the long-term. 

•  Investing in Gold is an option, but not ideal. Gold does not produce value or earnings, it just is there. It is a bit of a speculation aka gambling. Stocks, on the otherhand, are ownership shares in companies.  Companies generate products or services that generate revenue and hopefully profit for the shareholders. Bonds generate interest that are paid to the bondholders. 

If you have questions or need help, feel free to reach out to us at team@cashflowisthecore.com.