Money 101: Starting Your Investment Journey

When you think about your health and fitness what comes to mind? Running? Cycling? Weights? Perhaps it’s your diet. There are many ways to describe what health and fitness mean to you.

The same is true for your money. Whether it’s your first time being financially independent, building wealth, or living in retirement, money is the lifeline of your financial well-being. It is the one element that naturally operates like a bloodline through all our financial goals, regardless of age or net worth.

For some, money may seem basic on paper (pun intended). But for others it can easily feel intimidating or overwhelming.

Here are four principles to keep in mind as you get started:

1. Goals:

When it comes to your finances, the first question should be, “What are my goals?” Map out a plan for your goals and when you want to achieve them. Maybe your time frame is a few months, years, or even decades. It's important to establish a timeline before proceeding with an investment.

2. Cash Flow:

Reaching your goals can only be feasible by being conscious of what money is coming in versus going out. Knowing where your money is going is paramount to a healthy financial well-being. Your expenses are typically classified as either essential or discretionary. This practice is called budgeting which is a common challenge for many people. It's good practice to, at a minimum, know what your monthly take home pay is or how much you make each month. Then calculate your essential expenses. Anything related to housing or debt repayment is considered essential. For discretionary expenses, think of the fun stuff – dinners, trips, and social outings. Lastly – calculate how much you save each month.

Here are commonly cited budgeting best practices:

• Maintaining a 50/30/20 ratio of your expenses:
  • 50% of your take home pay goes towards the essentials (housing, utilities, food, etc.)
  • 30% of your take home pay can go to discretionary spending (travel, eating out, etc.)
  • 20% to savings and consumer debt repayments (debt other than mortgage)
• Practices that keep you on track to saving 20% of your income:
  • Direct at least 10% of your total take home pay to savings (more if you can). Try to take advantage of any pre-tax, qualified, savings plans (i.e. 401(k), IRA, Health Savings Account, etc.)
  • Safeguard your savings efforts by capping monthly debt not related to a mortgage, such as credit cards, to no more than 20% of your net monthly take-home pay. Keep in mind, the higher your credit card debt percentage, the less you can allocate to savings.
• Creating an emergency fund
  • This is cash savings to help cover events such as losing a job or paying for an unforeseen medical bill. A good barometer is about 3-6 months’ worth of living expenses. For example, if your monthly expenses are $3,000, 3-6 months’ worth of expenses would equal anywhere from $9,000 to $18,000. This approach is subjective. If you feel more comfortable saving a year’s worth of expenses in cash, go for it!

3. Risk

Perceptions of risk can vary from person to person. Generally, the more time you have to achieve your goals, the more risk some investors feel comfortable taking and vice versa.

It is up to you, as the investor, to decide what risk is appropriate for you. There are two common ways to think about risk: the psychological approach versus the numbers approach. The psychological approach pertains to "what keeps you up at night?" The numbers approach removes the emotion and pertains how much time to reach your goals. There is no right or wrong answer – it depends on which you value more.

Generally speaking, different investors may choose very different approaches depending on their circumstances and comfort with risk (i.e., a 22-year-old who prefers to hold cash or a 75-year-old who maintains a high allocation to equities). Investing can be a way to try and grow money over time. The relationship between time and risk is often discussed, since over longer time frames, markets may experience more cycles and volatility. If you have a longer timeframe, you may be better positioned to ride out market pullbacks and corrections, although recovery is not guaranteed. On the other hand, let’s say you are looking to put a down payment on a home within the next three years. Markets have historically experienced declines of 10-20% or more. How would a market correction change things if you kept that cash in the stock market? The closer you are to the goal the more important it is to preserve those assets.

How do we get our money working for us?

4. Types of Investments

To get your money working, there are three main categories (aka asset classes) to be aware of: stocks, bonds and cash.

• Stocks

• Stocks, also referred to as equities, can often serve as the common denominator to your goals. When you buy stocks, you are essentially buying a piece of the company, also known as equity.
• Stocks may be bought in the form of individual shares of a company or they may be bought as part of a diversified instrument (specifically through vehicles called mutual funds or exchange-traded funds otherwise known as ETFs). Think of the latter two as a basket of investments that may include anywhere from a few dozen companies to thousands.
• While there are no guarantees with stocks, they have historically outperformed inflation over time. Not to be overlooked, however, is the degree of risk that stocks and equities carry.
• While over time, equities could outperform inflation, you may experience losses. Sometimes the losses are small and over a short period. At other times, they can be greater and last for extended periods, such as months or even years. (Remember – past performance is not indicative of future results.)
• It is common practice to consider stocks when planning for a longer time horizon. If you experience a loss in your investment, markets have historically rebounded over time, though recovery is not guaranteed and timing can vary. A rebound in performance is more likely if you can maintain ownership of that investment.
• If you are risk averse or dealing with a shorter time horizon but still looking to achieve some appreciation, perhaps the next asset class may be more suited for you.

• Bonds

• With stocks you are a buyer of that investment. With bonds, you are considered a lender. Bonds are usually offered by a government entity such as the Federal Government in the form of Treasuries, or a state or local government in the form of municipal bonds. Although, not all bond issuers are government entities; companies may also issue bonds.
• When you buy a bond you are essentially lending the entity your investment. In exchange for your investment, the entity will agree to furnish an interest rate to you. That interest will be paid to you periodically over a period of time. The bond may pay interest over a few months or maybe decades. When you reach the end of the period, the entity is on the hook to return your investment. Typically, the longer you are willing to lend your investment out, the higher the interest rate you may receive.
• Another factor that can drive the interest rate is the solvency of the issuer. Since the U.S. government derives its revenue from taxes, they tend to offer some of the lower interest rates on the market. Public or private companies derive their revenue from the profits of their company. Since companies are susceptible to bankruptcy and other factors that determine their solvency, they may have to offer a higher interest rate than the U.S. government in order to attract your loan.
• While bonds may sound more secure than stocks, interest rates can fluctuate due to risks associated with the environment or inflation. Bonds can also trade like a stock, which means they can experience value fluctuations.
• Some investors use bonds in their portfolios as one way to help manage volatility depending on their goals and risk tolerance. This may be a good practice to consider if your time horizon is on the shorter side.

• Cash
  • If principal preservation and/or liquidity is your priority you may consider “cash” or money market investments. Similar to bonds, cash investments pay a monthly interest rate. Cash investments are fully liquid and generally carry lower risk than bonds, though they are not entirely risk-free.
  • And because this asset class is considered lower-risk compared to other asset classes their interest rates usually lag behind bonds and often times, inflation.
  • Cash is usually not a long-term investment. However, it may be an option for those in need of immediate access to funds or foresee a need within the next 12-24 months.

What comes next? How much time should I expect to allocate on my investments?

We’ve covered the main investment vehicles, now what approach should we take?

There are two main approaches: actively trade, or buy and hold.

Trading involves market timing. The goal of active trading is often to try to outperform the market, but this involves frequent trading and attempts at timing, which carries high risk and no guarantee of success. This approach comes with significant volatility and risk, and few find success – even fewer find success on a consistent basis.

Conversely, a buy and hold approach is designed for long-term investing and may provide opportunities for growth, though results will vary. A disciplined buy and hold approach may help some investors avoid selling in downturns, but there is no assurance of recovery or profits. By implementing a disciplined buy and hold approach, you position yourself to potentially rebound and prosper as opposed to selling on the downside.

What kind of investor do you want to be?

Whether you want your money actively traded or diversified for a buy-and-hold approach – you’ll need to select a Portfolio Manager. Many investors choose to work with an experienced Portfolio Manager, who can help design investment strategies while others prefer to manage their own portfolios. If you prefer to manage your own investments, it’s best practice to develop an Investment Policy Statement. This can equip you with your own personal playbook for investment decisions. You’ll want to consider the following:

• What types of investments do you want?
• How many?
• When do you buy?
• When do you sell?
• How often you may need to rebalance your portfolio?
• What are the factors that go into your decision making?
• How much time you can or want to commit to this?

These are just a few questions to consider. If you are in need of additional assistance or would like to clarify the information outlined above, do not hesitate to reach out to an Oppenheimer advisor. Together, you and your advisor can walk through your personal goals and investment approach.

There are thousands of investment options to choose from. Some are geared towards specific needs such as retirement accounts or after-tax brokerage accounts. It’s not just about seeking the right investments but also identifying the best account to house the asset.

Speak with an Oppenheimer Financial Professional today for tailored guidance.