Investment tips for dummies

As+of+may+2015%2C+the+2.58+million+IRA+accounts+total+%242.46+trillion+in+assets.++%2F%2FSam+Valadi

As of may 2015, the 2.58 million IRA accounts total $2.46 trillion in assets. //Sam Valadi

Story by Michael Bidun, Sports Editor

To many, investing in the stock market or any investment option seems too complicated for the “average” person not educated in finance to understand. But the market isn’t as complicated as it’s portrayed and never should be to the Average Joe on the street. So, here are some of the basics that everyone should know before investing:

Stocks vs. Bonds:

This one is pretty simple and is the basis of the stock market as most people understand it. A stock, by definition is the capital raised by a business or corporation through the issue and subscription of shares. So basically, the company offers an investor part of the company (a stock) in exchange for a certain amount of cash based on the company’s overall worth relative to the percentage of the company offered by one share. A bond, on the other hand, is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. In layman’s terms, the investor gives a loan to a company that is then payed back with interest in a certain amount of time.

Diversification vs. Asset Allocation:

Diversification and asset allocation are words used by financial planners and advisors every day that make the average person feel confused about investing. In reality, the two go hand in hand and can be explained in two simple sentences. Diversification is the investment in multiple different areas from airline stocks to real estate. This is in order to make the likelihood of losing money low. Asset Allocation, on the other hand, is simply the percentage of the money that an investor puts into one area or asset. Applying these two terms to investing allows investment portfolios (a collection of all assets) to be safer and less likely of varying wildly (being volatile).

Don’t hold the money, invest!

Every year inflation of the dollar goes up around two to three percent. This means that the money an investor has in a savings account (making on average around six one hundredths of a percent) is actually losing money every year. Other investments, such as bonds or certificates of deposit, are easy to invest in and offer much better returns than the traditional bank savings account, even though they don’t beat inflation every year. On the other hand, investment options such as individual retirement accounts (IRA) and mutual funds offer returns much higher than bonds often returning around eleven percent. While a retirement account may not seem like an option a teenager could invest into, that’s the opposite of the truth. As long as the teenage investor has a paying job, they can open an IRA and invest up to the amount they are paid in total per year, maxing out at $5,500 annually.

In short, an investor that starts saving $2,000 a year in an IRA at 17 can be worth $755,998 by 65 with only seven percent compounded growth annually. If that same 17 year old were to put in the max amount allowed every year with a market average of 10.7 percent growth, they would have $7.4 million by the age of 65. No joke.

Wrap Up

While the information above may have been a lot to take in, it can be simplified in a few sentences. Stocks are a percentage of a company owned, bonds are a loan to an organization. Diversification is how spread out the money is, while asset allocation is the percentage of money going into an area. But most importantly, investing money early and often is the best way to assure an early retirement and plenty of cash left over to enjoy. Investing is only as complicated as someone makes it, any average person can retire at 35 and be left the rest of their life to comfortably do whatever they truly want.

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