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Tag: index funds

  • Do you have FOMO when you invest?

    Everyone experiences FOMO, which is the Fear of Missing Out on various aspects of life, but it’s crucial to resist it when making investment decisions. In today’s post, we will learn why I made that statement.

    FOMO stands for “Fear of Missing Out.” It’s when people feel anxious or worried about missing out on something exciting or profitable.

    Imagine you’re on a road trip. You have a map that guides you to your destination. Sure, you might see some cool attractions along the way, but if you keep changing your route every time you see something shiny, you’ll never reach your destination!

    Similarly, in investing, your long-term plan is like your map. It helps you stay on track and reach your financial goals. While it’s tempting to jump into investments just because everyone else is doing it, you need to stick to your plan.

    When we make decisions solely based on FOMO, it can lead to impulsive choices that might not align with our goals. So, remember, while it’s okay to feel FOMO, it’s essential to have strong willpower and stick to your long-term plans.

    You can do that by practicing this phrase called “NO GO to FOMO”.

    “NO GO to FOMO” means saying no to impulsive decisions driven by FOMO.

    Instead of making quick decisions because everyone else is doing it, this phrase reminds investors to think carefully before acting. If your friends are all buying a certain stock because they think it will make them rich quickly. But you’re not sure if it’s a good investment for you, so you don’t blindly follow everyone.

    “NO GO to FOMO” reminds you to take your time, do your research, and only invest when you’re confident that it’s the right choice for you.

    Various investment opportunities like digital assets, meme stocks, and NFTs are gaining popularity because many influencers often promote these. The SEC emphasizes caution against FOMO, reminding investors not to follow others blindly.

    Investors should not base their decisions solely on recommendations from influencers and should resist the temptation to follow trends blindly.         

    Do you react to market swings?

    Reacting to market swings due to FOMO can be harmful to financial stability due to these reasons:

    1. When people react to market swings because of FOMO, they often make decisions without thinking them through. They might buy stock or sell them just because everyone else is doing it and they get afraid of missing out on profits.
    2. But the truth is, reacting impulsively like this can actually hurt your financial stability in the long run. Market swings are normal, and they don’t always reflect the true value of investments. Reacting to them based on FOMO can lead to buying high and selling low, which is the opposite of what you want to do as an investor.
    3. It can also cause you to miss out on real opportunities because you’re too focused on what everyone else is doing.


    Building a diversified investment portfolio can lessen risks that come with market volatility

    Diversification means spreading your investments across different types of assets, like stocks (which are like shares of companies), bonds (which are like loans you give to companies or governments), real estate (which is a property like a house or land), cash in checking and savings account and commodities (like gold, silver, oil, etc).

    Diversification within asset classes and avoiding timing the market are essential strategies to protect your investments. You can diversify within each type of investment too. For example, if you’re investing in stocks, you might choose different companies and industries. This you can easily do by buying ETFs or Index funds.  I have made several posts on that so you can check those out by searching these two terms.

    Also, it’s important not to try to time the market (which means predicting when to buy and sell investments based on what you think the market will do). Instead, focus on the long-term and stay diversified.

    What Should You Fear Missing Out On? **

    The first thing should be not planning for your future and setting Long-Term Goals

    You need to start prioritizing financial planning if you haven’t done already. This means setting long-term goals, like buying a house, saving for your children’s education, or planning for retirement. Having a clear plan helps you stay focused and make smart decisions with your money.

    The second thing is Not Paying Off High-Interest Debt like credit card loans

    Paying off high-interest debt should also be a priority. It’s like getting a guaranteed return on your investment because you’re saving money on those high-interest payments. So, please include paying off credit card debt or other high-interest loans in your financial plan.

    3rd is Not taking advantage of the Power of Compounding

    Start saving early and consistently. The power of compounding means your money grows over time, and the earlier you start, the more you benefit. Even small, regular contributions can add up significantly over the years and I will show you this through this calculator. Where you can see how by just investing $100 every month, you can make a lot of money in the future, if I just change the time horizon, see how exponentially your money can grow, with interest payments becoming the biggest factor of your total returns, as the years pass.

    The fourth mistake or what you should FOMO is Not taking advantage of free money through Employer-Sponsored Retirement Plans

    Don’t miss out on participating in employer-sponsored retirement plans like a 401(k), especially if your employer offers matching contributions. This is like free money and can lead to significant returns over time. This will ensure you have a secure retirement financially.

    So, remember to prioritize financial planning, pay off high-interest debt, start saving early, and take advantage of employer-sponsored retirement plans to ensure a brighter financial future.

    Successful investing requires discipline, patience, and a long-term perspective, not reacting impulsively because of FOMO.

  • Get rich with these secrets

    Have you ever wondered how some people become incredibly wealthy?

    Well, in this post, I’m going to share with you some habits that I have adopted that are helping me achieve financial freedom earlier than I thought possible.

    But don’t worry, this won’t be your typical boring financial advice because we’re going to have some fun with my real-life examples.

    Before we get into it, I want to say that it is never too late to adopt these habits to become financially free. Even with a Master’s degree in economics and having worked in financial litigation for many years, I never learned about money management. I got married early and my husband handled our household finances and I never really cared to learn.

    But in recent years, I started learning about personal finance and this field fascinated me so much that I decided to start my YouTube channel around it.

    Secret #1: Live below your means and create an emergency fund

    First off, the most important habit that I have followed for many years is to live below my means. I always try to cut unnecessary expenses and understand the difference between needs and wants.

    After creating an emergency fund account in a high-yield savings account that will easily cover 12 months of my family’s expenditure, I started investing my extra savings in various types of assets. I use Ally Bank, but this is another post where you can see other high-yield savings account options. High-yield savings accounts give more interest rates than traditional banks.

    What I do is I follow something called paying yourself first. So as soon as I get my paycheck, I put 20% of it directly into my savings account or investment account. You can create an automatic transfer so that 20% is already taken out and it doesn’t go into your checking account where you can spend it.

    Secret #2: Start investing as soon as possible

    Once you have created enough savings to cover 6-12 months of expenditure, start focusing on growing your wealth.

    So yes, you need to prioritize investing your money wisely. This is the easiest way to grow your wealth. Because when we leave our money invested for a long term in something like an ETF OR index fund or real estate, it grows many folds as time passes. If you don’t have the money to invest in real estate, you can start with REITs.

    Secret #3: Set clear financial goals and divide them so they are achievable

    Now I want to talk about the power of setting clear financial goals. By knowing exactly what you want to achieve, you can focus your efforts and make smarter decisions.

    I make a habit of setting my goals every year. I create a list of the important things I really want to achieve. To make it manageable, I focus on only 2 or 3 goals every three months. I find that having too many goals at once can be distracting.

    I write down my goals in a place I see every day, like one app that I use is called Asana (it is a productivity app), but you can use whatever tool you like. The key is to take control of your time and find a system that suits you.

    Every morning, I check my Asana tasks and ask myself which ones bring me closer to my goals. I prioritize and tackle those tasks first. It might seem odd, but it’s about planning your time around your goals, not just fitting in time to work on them. After handling daily tasks and chores, I focus on connecting my daily activities to my goals. This helps me turn big goals into small, achievable steps each day.

    So if you have a job and earn x amount of money yearly, you can calculate how long it will take you to achieve financial freedom where you don’t have to work actively and can enjoy your life, and live comfortably off of passive income.

    So if you are still in your 20s, you will probably start by working for a company. Now you have to think about how do you get promoted faster. Will this involve working harder or do you have to learn a new skill to get a promotion fast?

    At the same time, you should start thinking about more ways to earn money. You need to think of ways to build passive income, like investment income and through side hustles or starting your own business. Write these somewhere.

    When you are young and don’t have family or kids, you have more time to devote to your career.

    If you have a particular skill, you can monetize it using YouTube, selling a course online, or using platforms like Etsy to sell digital products. This may take a lot of initial effort but is so worth it

    For most self-made wealthy people, there is more than one source of income AND they monetize the skill they are good at.

    Secret #4: Manage your money wisely

    This is a BIG habit that sets millionaire apart from others, they know how to manage their money wisely. We have to limit unnecessary expenses that we can’t afford yet. So From budgeting to investing, it’s crucial to have a firm grip on your finances. I use an app called Mint which lets me track my expenses in different categories. I know what are the essentials in my life, my needs that I can’t live without, then I have to keep track of how much money I am spending on my different wants and how much I am saving and investing

    When we don’t give priority to budgeting and investing, and keep spending money, we tend to suffer later. When we start saving early and invest our money and make regular contributions to it, because of the power of compounding returns, our initial investment becomes so much more in the future years which we can’t even imagine.

    I wrote another post on this with examples, so that should give you some idea of why it is crucial to save and invest from an early age to achieve that financial freedom and your dream life.

    Secret #5: Surround yourself with like-minded people

    Additionally, what I do is I surround myself with like-minded individuals who inspire and motivate me.

    So, try and network and meet with like-minded individuals to build relationships. You can find these groups online. Sometimes, we meet people who can help us achieve our dreams fast.

    Secret #6: Work hard

    Next, I want to talk about the habit of relentless hard work and patience.

    Success doesn’t come overnight, and it certainly doesn’t come without putting in the effort.

    Many times we feel SOME people just got lucky, but everyone has a long journey and the amount of hard work successful people have to put in is not easily visible to others.

    I have degrees from very prestigious universities. When I was still a student in high school, I had a clear vision, that I needed to get good grades to get into a good college. From there, I consistently worked hard because I knew how competitive it was.

    I grew up in a middle-class family in India and getting good education was the only way for us to move ahead in life. Both my parents had government jobs and I saw how they prioritized savings over spending.

    From the beginning, I had a mindset that if I didn’t work hard, I wouldn’t be successful in my life. In India there are a lot of people and limited jobs, so everything becomes more competitive.

    After marriage, I moved to LA where my husband lived and my parents had to take A HUGE loan, so I could study at USC in LA, which is a private institution and has a big tuition cost.

    So for me, it was obvious, that I needed to find a good-paying job as soon as I graduated so I could pay off my student loans and earn a comfortable salary that could support me and my husband to fulfill OUR American dream.

    To get my first consulting job in LA, I worked hard to get a high GPA in economics (3.9) so I could get an interview opportunity. I was an international student and not many companies wanted to sponsor my visa.

    I knew had to stand out. So I put in a lot of hard work to get good grades and applied to different companies to get an internship. Even at my full-time consulting job, I continuously had to learn and improve my skills to stay valuable to the company. I learned programming and I got better at MS Excel, report writing, and presentation skills.

    Now with two kids, two YouTube channels, and another full-time job, I still have to work very hard, but at the end of the day, it is very rewarding. We have so much we can achieve, we just have to keep working towards it.

    Secret #7: Don’t be afraid of initial setbacks

    Also, don’t be scared of initial setbacks, It is very important to be persistent and don’t get discouraged by failure in the beginning.

    Even if you do not achieve success first, you will still learn from your efforts. In my case, if some of my videos don’t do well, they still teach me what didn’t resonate with my viewers. Even if I get some hate comments, I don’t give up and instead focus on how to get better at my videos and provide better content to my viewers.  

    I have faith that If I keep putting in the hard work and I continue to make small improvements in making quality videos, people will ultimately start relating to the message I want to convey. So yes, what I want to say is that even with initial setbacks,  there’s learning and your efforts will not get wasted.

    It is very important to stay focused on your vision and to believe in yourself. Success often comes to those who keep pushing forward, no matter what challenges they encounter.

    There was a time when my kids were young and I had to take a break from my job. But I never left learning and continued to find other opportunities to earn a side income even when I couldn’t get back to full-time job, I started working part-time with my in-laws on their clothing business. Even to date, I work on that.  I created an Etsy channel and learned so much about the fashion industry in America and the ethics of business and marketing, which was not part of my background.

    Another important habit that makes people rich is when they understand the importance of being proactive and start taking initiative.

    Please don’t wait for opportunities to come to you, actively seek them out and make things happen. We are living in the informational technology world and there are so many free resources out there for you to learn and get better at anything you want to.

    Now it is only up to you to take advantage of it. Sometimes we spend too much time planning and keep gathering information and don’t take action. You need to change that.

    Each one of us has some talent and we need to find that unfair advantage that sets us apart from many other people. and in the current times, it is much easier to make money using your talent where you can provide some unique value to benefit many other people.

    Right now I am working on creating an online economics course that will be for high school and college students. It is taking a lot of my time but when you work on your passions, it doesn’t feel like work anymore because you are enjoying it every single minute. So yes please take initiative and don’t wait for the perfect opportunity. It is better to start somewhere and learn along the way. If you keep watching inspirational videos but don’t take action, then there is no gain.

    Secret #8: Continous self-improvement and growth

    Another habit that’s helped me achieve financial freedom is continuous learning and personal growth.

    I have been continuously learning something new, whether it is for my job, for my clothing business, or my YouTube channel.

    From my job, I got really good in Excel, basic programming skills in understanding companies’ financials and report writing. This helped me start an economics and personal finance blog which ultimately led to me starting this YouTube channel.

    To make videos, I had to learn video editing skills. So Investing in yourself is just as important as investing in your financial portfolio.

    While a lot of information is free, sometimes you have to pay a small amount to learn a specific skill. Don’t be afraid to invest in yourself because in the long run, it will pay off.

    #Secret #9: Take calculated risks and invest in broad-based funds

    And speaking of investments, let’s discuss the habit of taking calculated risks. Most people think that investing in the stock market is a gamble, but actually, if you look at the data throughout history stock market in the form of SP500 has not performed badly over any 16 years. So one easy way to get rich that I follow is to leave my money invested in broad based index funds along with the 401k retirement account. Both me and my husband have our employer-sponsored retirement accounts along with other investments in index funds. The earlier you start the better it is for you.

    For investing in the stock market, you can start by investing in a broad-based ETF or index fund. I have a separate post, where I talked about 3 good index funds to invest in, so you can read it for all the information. Index funds and ETFs give you diversification and over the long term they have given an average yearly rate of return of 10%.

    Secret #10: Follow the law of attraction

    The law of attraction is a powerful principle that states that like attracts like.

    When it comes to money, the law of attraction teaches us that our thoughts and beliefs directly influence our financial reality.

    By aligning our thoughts with abundance and wealth, we can attract more money into our lives.

    Start by visualizing yourself already having the money you desire, and living a life of financial freedom and abundance.

    Believe with conviction that you deserve to be wealthy and that money flows easily and effortlessly to you.

    Practice gratitude for the money you already have and celebrate even the small financial wins in your life.

    To manifest money using the Law of Attraction, it’s also important to take inspired action.

    Be open to opportunities, be proactive in seeking financial knowledge, and take steps towards your financial goals.

    Avoid dwelling on lack or scarcity, as this will only attract more of it into your life. Instead, focus on abundance, wealth, and financial success, and trust that the universe will provide.

    Remember that the Law of Attraction is not a magical solution overnight, but a powerful tool for shifting your mindset and beliefs. Consistency and perseverance are key to truly harnessing the power of the Law of Attraction when it comes to money.

    Stay committed to your financial goals, believe in your ability to achieve them, and keep taking steps forward. As you continue to align your thoughts, feelings, and actions with abundance, you’ll start to notice positive shifts in your financial reality.

    Recap:

    To recap, to become a millionaire, I started living below my means at the start. I prioritize wise investments, educated myself about finance, set clear goals, and built multiple streams of income.

    I like to surround myself with successful individuals because as I said your peers influence you. I like to stay disciplined and avoid impulsive buying.

    I also understand that success doesn’t come easy and there is a lot of hard work that goes behind it, so work hard, be patient, stay motivated, and take calculated risks and once you achieve that financial freedom don’t forget to give back to the needy who can benefit from your little financial help.

    I think you truly feel rich when you give back to society. Remembering to appreciate what you have and helping others along the way is very enriching.

    Doing only things that only “serve you” is a bit selfish. I believe if we are capable, we should help others who would benefit from our financial support. If god has blessed us with wealth, we should be grateful and help other hard-working people. I like to do charities and sponsor underprivileged children’s education so they can have a better future. This gives me a purpose and I feel truly happy doing that.

    So, these are some habits that have truly made me rich, and I know they can do the same for you!

  • Key investment questions you need to ask

    As an investor, there are various topics and questions that you might find yourself searching for. Here are some of the most common and searchable issues and questions:

    1. Stock Market Basics:
    • How does the stock market work?
    • What is a stock?
    • How to buy and sell stocks?
    • What are stock market indices?
    1. Investment Strategies:
    • What is the best investment strategy for beginners?
    • How to diversify an investment portfolio?
    • What is dollar-cost averaging?
    • What are the pros and cons of active vs. passive investing?
    1. Risk Management:
    • How to assess and manage investment risk?
    • What are the different types of investment risks?
    • How to protect investments during market downturns?
    1. Investment Analysis:
    • How to evaluate a company’s financial statements?
    • What are key financial ratios for investment analysis?
    • How to perform the fundamental analysis?
    • How to analyze stocks for value investing?
    1. Investment Vehicles:
    • What is the difference between stocks and bonds?
    • How do mutual funds and exchange-traded funds (ETFs) work?
    • What are the benefits of real estate investing?
    • How to invest in cryptocurrencies?
    1. Retirement Planning:
    • How much money do I need to retire?
    • What are the best retirement savings accounts?
    • How to plan for retirement income?
    • What are the different types of retirement plans?
    1. Taxation and Investment:
    • How are investment gains and dividends taxed?
    • What are the tax implications of different investment vehicles?
    • How to minimize taxes on investments?
    1. Market Analysis and Trends:
    • What are the current market trends and forecasts?
    • How to analyze technical indicators in stock trading?
    • What are the factors that impact the stock market?
    1. Investment Psychology and Emotional Intelligence:
    • How to control emotions when investing?
    • What are common investment biases to be aware of?
    • How to maintain discipline in investment decision-making?
    1. Investment Tools and Resources:
    • What are the best online brokerage platforms?
    • Are there reliable investment research websites or apps?
    • How to use investment calculators and portfolio trackers?

    I plan to cover these topics in my future posts, some I have already covered, so you can check those on my blog. Also, follow my youtube channel if you prefer listening to or watching the same content.

    Remember, the investment landscape is vast and ever-evolving, so it’s essential to conduct thorough research and stay updated on relevant topics and trends in order to make informed investment decisions.

  • My top picks for passive income ideas

    Are you tired of trading your time for money? Then it’s time to explore the world of passive income! It can be a great addition to your active earned income.

    But first, let’s understand what it takes to generate passive income and what passive income really means.

    Passive income is the money you earn with little ongoing effort or active involvement. It’s like having your money work for you while you sleep or enjoy your life. In other words, it is income that continues to be earned even when a person is not actively working or trading their time for money.

    Today, I’ll cover my list of passive income sources that can earn you money while you sleep. From rental properties to affiliate marketing, we’ll take a deep dive into these opportunities and give you the tools to start generating passive income for yourself.

    But before we look into these different options, I want to tell you that what may work for one person may not work for another depending on their skills, interests, and financial situation.

    The ideas I am going to share have varying degrees of passivity. Some may require more upfront money than your time commitment, while others may require more of your time than money. However, all of these options will provide you with passive income in the coming years after the initial few months of time, effort, and investment. So let’s dive in.

    1. Dividend-paying stocks:

    Dividend-paying stocks are a type of investment that pay you a portion of the company’s earnings as dividends on a regular basis. For example, if you own 100 shares of a company that pays a $1 per share dividend each year, you’ll earn $100 per year in passive income.

    Graph Growth Development Improvement Profit Success Concept

    Of course, investing in the stock market always carries some risk, so it’s important to do your research and diversify your portfolio. One way to do that is to invest in index funds or ETFs: Index funds are investments that track a market index, such as the S&P 500.

    Investing in an index fund can earn passive income from the dividends paid by the companies in the index. How much money you make from dividends, obviously depends on the amount you invest and which type of index funds you chose.

    Many index funds and ETFs track dividend indexes, which are comprised of stocks that pay dividends. For example, the iShares Select Dividend ETF (DVY) tracks the Dow Jones U.S. Select Dividend Index, which is made up of 100 high dividend-paying stocks.

    On their website, it says “The iShares Select Dividend ETF seeks to track the investment results of an index composed of relatively high dividend paying U.S. equities.”

    By investing in an index fund or ETF, you can get exposure to a diversified portfolio of dividend-paying stocks with lower risk than investing in individual stocks. Additionally, many index funds and ETFs offer relatively low expenses, making them a cost-effective way to invest in dividend-paying stocks.

    I have written several posts explaining what index funds are, so you can check those out here.

    2. Rental Properties:

    Rental properties are another popular form of passive income. By owning a rental property, you’ll earn rental income each month from tenants. You can also build equity in the property over time, which can increase its value and your passive income.

    While rental properties can be a great source of passive income, there are also some disadvantages to consider like high upfront costs. Investing in a rental property often requires a large amount of upfront capital, which can be a significant barrier to entry for some investors.

    Also, Rental properties require ongoing maintenance and management, which can be time-consuming and expensive. This includes routine repairs, handling tenant complaints, and managing rental payments.

    In addition, there is always a risk of tenant problems, such as non-payment of rent, property damage, or legal disputes. These issues can be stressful and time-consuming to resolve.

    Also If a rental property is not occupied, the owner may not generate any rental income. Turnover is also a common issue, as tenants may choose to move out at the end of their lease.

    So, It’s important to carefully consider these potential disadvantages before investing in rental properties as a form of passive income. However, with proper management and a long-term investment mindset, rental properties can still be a lucrative source of passive income for many investors.

    3. High-Yield Savings accounts:

    3rd option is saving your money in a High yield savings account than saving your money in a traditional savings account. High-yield savings accounts are designed to help customers earn more interest on their savings while still having the flexibility to withdraw their money when they need it. So if it is paying 4% and you have $10,000 saved in it, you will get $400 as interest income at the end of one year vs getting $25 in a traditional saving account that pays 0.25 percent.

    One of the primary advantages of high-yield savings accounts is that they typically have lower costs because they are online banks and not brick-and-mortar banks so they can pass those cost savings to their customers through higher annual percentage yield or APY this means that customers can earn more interest on their deposits over time which can help their money grow fast.

    Marcus by Goldman Sachs, Capital One, Sofi, Lending Club, and Ally Bank are a few banks that offer high-yield savings accounts. You can check their website, but the interest rate they currently offer ranges from 3.75% to around 5% as of May 18, 2023.

    Just keep in mind that Some, high-yield savings accounts may have certain requirements or restrictions, such as minimum balance requirements or limits on the number of withdrawals allowed each month, so you can check those out at their website.

    Also, remember the interest rates on these accounts can fluctuate over time, so it’s important to monitor them regularly. But usually, they are a better option than traditional savings accounts as they also have atm services.

    4. Create an online course:

    This can be a great way to earn passive income from your expertise. Once you create the course, you can sell it on platforms like Skillshare, Udemy, or Teachable and earn passive income from each sale.

    The initial work of creating the course and setting up the platform will require significant time and effort, but once the course is created and available online, it can generate income with minimal ongoing maintenance. So that’s when you will start earning passively.

    Of course, the success of the course will depend on various factors such as the demand for the topic, the quality of the course material, the marketing strategies you use, and the competition in the market for that subject. However, if the course is well-made and marketed effectively, it can attract a large audience and generate a consistent stream of income.

    Overall, creating an online course can be a viable passive income option for those willing to put in the initial effort and have expertise in a particular area.

    5. Create a blog:

    By creating a blog and attracting a large audience, you can earn passive income from advertising, affiliate marketing, or sponsored posts.

    This can be a good passive income option for those with a passion for writing and a willingness to put in consistent effort over time. Starting a blog requires setting up a website, creating quality content, and marketing the blog to attract readers.

    Once the blog gains a following, it can generate income through various channels such as affiliate marketing, sponsored posts, and advertising revenue. However, it may take a while for the blog to gain traction and generate substantial income, so you have to be patient about that. I do have a blog called your everyday economics. I enjoy writing and sharing my knowledge with others, so this was something I started doing exactly and year ago.

    Again, like online courses, the success of the blog depends on various factors such as the quality and relevance of the content, the audience size and engagement, and the marketing strategies you use. Also, it’s essential to keep the blog updated with fresh and relevant content to maintain the readers’ interest.

    So you can give it a try if you enjoy writing, and like keeping yourself updated about the topic, and most importantly you are willing to spend a couple of hours on the blog each week to keep it running. You will start earning on previous posts that you have written, and it can be a great source of income. In fact, Several bloggers have quit their full time and made blogging their full-time profession once they saw good results.

    6. Renting out your unused space (such as a spare room or parking space):

    This is another option for passive income but can only work for some individuals who have the space to rent. But if you have that extra space you are not using, it won’t harm to advertise it for renting purposes.

    7. Investing in rental storage units:

    This can be another good way to earn passive income. Once the units are built, you’ll earn rental income each month without having to actively manage them.

    This option can be a viable passive income option, especially if the investor can acquire the units at a reasonable cost and in a prime location. Rental storage units can generate steady rental income with relatively low maintenance costs compared to other types of rental properties.

    However, there are a few drawbacks to investing in rental storage units. The demand for rental storage units can fluctuate depending on the economy and season, which can impact the occupancy rate and rental income. Also, investing in rental storage units requires significant upfront capital, including the cost of acquiring the property, property taxes, insurance, and maintenance costs.

    Investing in rental storage units can be a viable passive income option if done correctly, but it requires significant upfront capital and ongoing effort to maintain profitability.

    8. Sell digital products:

    Selling digital products can be another good option to get passive income: If you have skills in design, photography, or writing, you can create digital products like e-books, templates, or stock photos to sell online.

    There are several online marketplaces where you can sell your e-books, templates, and stock photos. I will share Some of the most popular options, one of which I have used myself.

    When choosing a platform to sell your digital products, you should consider factors like fees, payment options, and audience reach. You may want to try out a few different platforms to see which one works best for you and your products.

    1. Amazon Kindle Direct Publishing – This is a platform that allows you to self-publish and sell your e-books on Amazon.
    2. Etsy – This is an online marketplace for handmade and vintage items, including digital products like templates. I myself have an Etsy shop for handmade high-end fashion clothing. I will put its link in the description below. I have seen many shops selling digital products like templates, themed birthday party supplies, and party games that you can download and print.
    3. Creative Market – This is a platform that sells a variety of digital products, including templates and stock photos.
    4. Shutterstock, Stock, and Adobe Stock – These are platforms where you can sell your stock photos and earn royalties each time someone downloads your image.
    5. Sellfy – This platform allows you to sell digital products directly to your audience, including features like payment processing and marketing tools.

    When choosing a platform to sell your digital products, you should consider factors like fees, payment options, and audience reach. You may want to try a few different platforms to see which works best for you and your products.

    9. Royalties:

    If you’ve written a book, recorded music, or created other types of intellectual property, you can earn passive income through royalties. These are payments you receive based on the sales or usage of your work.

    10. Make a Youtube channel

    I would rate starting a YouTube channel for passive income as a good option, but it requires a lot of effort and time to be successful. The competition on the platform is high, and it can take time to build an audience and generate consistent income.

    However, if you have a passion for creating content, and are willing to put in the work, it can be a rewarding way to earn passive income. The channel should fulfill one of two criteria, it should be either entertaining or educational.

     YouTube’s Partner Program allows creators to earn revenue through advertising and other monetization strategies like affiliate marketing and sponsored videos where the creator is promoting a specific product.

    As for me, right now my channel is not monetized, and I can’t reap any rewards of passive income yet, but hopefully, in the future, I will. I know many other successful YouTubers do it as a full-time job earning hundreds of thousands of dollars.

    Conclusion:

    So these are all the options, hope you find something you like and can make it work. Just remember that while passive income may not require constant active effort, it often requires initial setup, sometimes money investment, ongoing management, and occasional maintenance to keep it sustainable and growing.

  • The Top Performers: Ranking the Best S&P 500 Index Funds to Invest in 2023

    If you want to invest in the U.S. stock market and get diversified exposure, S&P 500 index funds are a great option. These funds passively track the large-cap stocks that represent about 80% of the total value of the U.S. equity market.

    Passive investing means no fund manager is actively choosing which stocks or investments to buy or sell. Instead, they just follow an index like the S&P 500. This means you’ll own a little piece of all the companies in that index, without having to pick and choose individual stocks yourself.

    Although there are many index funds that track the S&P 500, there are three options that stand out because of their ultra-low expense ratios. This means more of your money stays invested in the fund, earning greater returns. Additionally, all three funds have a historical performance that closely duplicates or even exceeds that of the benchmark index.

    Today I’ll discuss some of the best options available in the market and the benefits they offer investors. My analysis is done with the help of this Morning Star report and my research on these three funds from their websites.

    Remember, you only need one S&P 500 index fund in your portfolio, and splitting assets between two funds is unnecessary. They all give very similar returns.

    1. Fidelity’s S&P 500 index fund (FXAIX)

    This fund has the lowest expense ratio on the list of the most popular ones, charging only 0.015% annually. It has historically outperformed its benchmark index and offers a competitive dividend yield.

    The Fidelity 500 Index Fund is an excellent option for investors looking for a single-core holding. It doesn’t have a minimum investment requirement for any account type, making it an attractive option for early-stage investors.

    The only downside is its performance history is comparatively brief and it is one of the newest funds. This may deter some investors who prefer funds with a longer track record.

    2. Charles Schwab S&P 500 index fund (SWPPX)

    Moving on, Charles Schwab’s S&P 500 index fund has a slightly higher expense ratio than Fidelity’s offering, but it comes with the benefit of more than two decades of performance history. This makes it a big plus for investors who are willing to pay a bit more for a fund with a longer track record, competitive historic returns compared to the S&P 500, and a nice dividend yield.

    This fund has a $0 investment minimum for all account types. This makes it an excellent option for earlier-stage investors looking to access large-cap holdings without the stress of choosing individual stocks.

    3. Vanguard’s S&P 500 index fund (VFIAX)

    Lastly, we have Vanguard’s S&P 500 index fund, one of the biggest names in the industry. It has historically outperformed the benchmark index, offers a dividend yield of 1.63%, and has an extremely low expense ratio.

    However, this fund does have a $3,000 investment minimum, which can be steep for some investors, even when investing with individual retirement funds (IRAs). In that case, Vanguard’s S&P 500 exchange-traded fund (ETF), VOO, may be a better option for those looking for a lower-cost entry point.

    Overall, these S&P 500 index funds offer investors an excellent opportunity to get diversified exposure to the heart of the U.S. stock market, and each has its unique benefits that cater to different types of investors.

    Here is a quick comparison of these index funds in a tabular form. This data is current as of April 24, 2023.

    You will notice that Vanguard has a minimum investment of $3,000, but you can also invest in Vanguard’s counterpart S&P 500 exchange-traded fund (ETF) VOO, which has a $1 minimum investment.

    So which S&P 500 Index fund is right for you?

    When choosing an S&P 500 index fund, there are a few things to consider:

    First, look at the expense ratio, which is the fee you pay for the fund’s upkeep. As index funds are managed passively, you’ll want a fund with a low expense ratio.

    Also, consider the minimum investment required for the fund and if it fits your budget.

    The dividend yield is another factor to compare between funds, as it can boost returns.

    The fund’s inception date is important if you prefer a solid track record for the fund before investing.

    Conclusion

    I have read many best-selling personal finance books and keep reading online blogs on investing. All of those authors recommend passive investing over active investing in the current age.

    Most active investors can’t consistently beat the market even if they try to do their best. In fact, the high fees you will end up paying to them compared to the index funds mitigate any extra money you will make from them.

    Also, the process of investing shouldn’t be complicated. You shouldn’t focus on timing the market and buying and selling to make short-term gains. Instead, keep your money invested in index funds to let it grow over time.

    By investing in an index fund, you’re spreading your money around, so you’re not putting all your eggs in one basket. That way, you’re more likely to make money over time because you’re invested in a diverse group of companies.

    Index funds let you put your money into many different companies, so if one company doesn’t do well, you still have money in the other companies to help make up for it.

    So, take the emotions out of investing, invest in one of these index funds, and let compounding do its magic! You are much more likely to become a millionaire this way than by doing active trading.

  • What should we do when the stock market falls? Should we panic and start selling?

    In 2022, the U.S. stock market experienced what we call in finance a bear market. There was a prolonged drop in stock market prices because of the Russia-Ukraine war and tightened monetary policy. The S&P500, the U.S. broad market index kept falling by more than 20% from its high at the beginning of 2022.

    With continuous interest rate hikes, S&P 500 index showed a downward trend in 2022 and hasn’t recovered to its Jan 2022 level
    Source: Google Finance

    But if this scared you and you concluded investing in stocks is not a good idea, you must think again. 

    Financial literacy is critical for building wealth. It is important for any person to know how market trends work, but particularly important for younger adults who are in their 20s.

    Although I have taken the U.S. stock market as an example for this post, the principle applies to almost any country with a developed stock market.

    In this blog, I will highlight two key points:

    1. Investing in stocks should always be done for the long term. If you look at the data over the long run, the overall stock market gave an average annual rate of return of 10% to 14%. 

    This chart from Google Finance shows that S&P 500 index, which is the benchmark index for US stock Market has an upward trend over the long run.

    Source: Google finance S&P500 index

    Sure, there are years (including 2020, 2022 as you see in the chart below) when it has fallen sharply because of various economic reasons. However, in the long run (5 yrs or more), if you see the trend line, it is going upwards.

    Source: Google finance S&P500 index. I added my captions to explain the dips

    So, yes if you just invested at the beginning of 2022 and wanted to take out your money after that, you would lose money on your investment. But if you plan to withdraw the same money in the next 5 or 10 years, I am sure it is going to fetch a much higher return. 

    2. Business Cycles are real

    The reason for this is due to the occurrence of business cycles or sometimes what we call economic cycles. Most stable economies exhibit boom and bust. The chart below shows how there are periods of expansions and recessions where the GDP and stock market grow and contract respectively.

    Most governments including the U.S. government through their fiscal policy and the Fed, through monetary policy, take corrective measures to bring the economy back on track. For the US, the target rate of inflation is 2% and the target unemployment is around 5%.

    Over the long run, most stable countries show a pattern of economic growth as seen by the black trend line sloping upwards.

    So yes, if you invest in the stock market for a long term, greater than 5-10 years, you should get a positive return. It will still be positive even after adjusting for inflation.

    So don’t panic and start selling when the market starts falling, instead, wait and let it recover.

    This actually would be the best time to start investing or adding more towards your monthly contributions. The best way to do that is by following a safe investment strategy such as dollar cost averaging. I have discussed that in detail in my previous articles on personal finance.

    Have a balanced portfolio

    But don’t put all your money in the stock market. For any investor, it is critical to have a balanced portfolio. Make sure to have an optimal mix of riskier and safer asset classes based on your age and risk tolerance. 

    Bonds are a relatively safer investment option compared to stocks, real estate, and gold, and therefore, have low returns on them. 

    Anyone who is less than 50 years old can have more of their money invested in the stock market versus anyone who is 50 and above.  As you approach retirement age, you would like to have less money invested in the stock market and more in safer options. So, whenever you want, you can withdraw your money without worrying about market fluctuations.

    Investing in stock is done to make your money grow over time. Yes, overtime is the keyword here. It is not meant for becoming rich overnight or for short-term gains.

    Also, it is best to start investing early to reap the maximum benefits. Although, starting at any age is better than not starting at all unless you are close to your retirement age. Ideally, as soon as you get your first job you should think about investing a portion of your salary. You can start with 10-15%.

    Create an emergency fund and pay off debt first

    But before you start any type of investment, ensure you have enough cash to cover at least 3-6 months of expenses in an emergency fund. Usually, people like to keep it safe in an FDIC-insured high-yield savings account. This is the liquid money that will cover any type of contingency, which you can withdraw whenever you want to.

    So it is essential you save enough money to cover the downpayment of your house, job loss, car breaking down, or any unforeseen event where you need immediate cash.

    This is especially true if people fear a recession coming in 2023. Having a buffer in a safe place such as a savings account will give you peace of mind.

    Also, don’t forget to clear all the high-interest loans (over 5%), such as credit cards. Western countries have taught the world to live on credit. We buy almost every single day so many things on credit cards. But sometimes people don’t realize it and by living above their means, go into a debt spiral.

    The interest rate that you are paying on credit card loans is usually higher than what you earn from savings.

    We must remember that we do most investments for the long run. We won’t get a 10%-12% guaranteed return from investing in stocks the very next year. It takes at least a couple of years to average out market fluctuations.

    Cherry-picking stocks is not worth it

    As I mentioned in my other article, it’s always best not to invest too much money in individual stocks. It’s too much work to go through the company’s financials, thoroughly reading their annual reports (10-Ks) and quarterly reports (10-Qs) to understand the company’s fundamentals and prospects.

    Even professionals and seasoned investors cannot time when to buy or sell stocks based on the earnings call of the companies. The reason is simple. The stock price that we see on the market has already incorporated any type of news that is available to the public. Thus everybody already knows and you won’t know any better story. 

    You will not know any insider news about the company’s prospects unless you are the owner of that company or in the senior management. Speculating what the price is going to be tomorrow will be nearly impossible to do. 

    Diversification is the answer

    Index funds or ETFs in this case are the best and safe options because they diversify your risk across so many different stocks. So even if one or a few companies underperform, you will be still fine. 

    With ETF you have to set reminders for periodic contributions. Which type of fund is right for you depends on many factors. I have a detailed article on this topic here if you want to learn more.

    My two cents

    So, after you have saved for an emergency fund and paid off high-interest debt, start by investing at least 10%-15% of your paycheck every month. You can put this money in some type of broad-based index fund on an ETF. You make monthly contributions so that your investment grows over time. The good thing about index funds is that they are automated. Money automatically transfers to your brokerage account from your checking account.

    The key takeaway from this article is that do not panic if you see the stock market going down in a particular year. This is not the time to sell. In the current scenario, it is a good idea to invest the money that you have sitting idle in your bank account. Do it after paying off your high-interest debt and establishing an emergency fund to meet your 6 months’ expenses.

    Spend wisely and realize the importance of saving and investing. Most millionaires are not just born wealthy. They just make good investment decisions early in their life and build wealth. Instead of spending a lot of money on things that actually depreciate in value, such as buying a fancy car, they save and invest that money from the beginning. As their investment grows, they begin to reap its benefits for a substantial part of their life. Investment in a diversified portfolio is an easy passive way of getting rich, where money does the work for you.

  • Funds basics: part 2

    Should I invest in a mutual fund, index fund, or in ETF?

    In my previous post about funds, I mentioned that there are mainly four main types of funds. These are mutual funds, exchange-traded funds or ETFs, index funds, and hedge funds.

    Today we will look more closely at each one of these funds but will focus on the first three types. Hedge funds are for very wealthy people, so let’s not worry about those for now.

    Also, for comparison purposes, we will only look at funds that invest in stocks or what we call equity mutual funds for simplicity.

    We will learn how these three funds are similar and how they differ from each other. I think it is good to know their characteristics because often people don’t know the distinction and use them interchangeably.

    So let’s start with mutual funds- the oldest of all three!

    Mutual funds have been there for the longest time. The first mutual fund was created in the U.S. in 1924.

    You can buy mutual funds from mutual fund companies or through stockbrokers. The price of a mutual fund is set at the end of each trading day based on its net asset value or NAV.

    Benefits of mutual funds

    The main benefit of a mutual fund is the diversification it offers you. Diversification is an investing strategy that reduces your risk by spreading out your portfolio. I talked about this in my earlier post, that you don’t want to put all your eggs in one basket. By investing in a mutual fund, you get a tiny slice of each of those companies that are in the fund.

    The other benefit is convenience. Investing in a mutual fund reduces your cost and the transactions you have to do. When you invest in mutual funds, you only make one purchase when you start. You get a share of each of the stocks that are in the fund, without having to pay a commission on each company’s stock trade. You can then invest more money in it periodically.

    Without a mutual fund, if you want to buy a lot of stocks, this will involve a considerable amount of your time and money.

    Are there any cons of investing in a mutual fund?

    The second key feature is that mutual funds are mostly actively managed Funds. What do we mean by actively managed?

    It simply means some finance professionals are doing the research and selecting the stocks for you based on their judgment. The main aim of these professionals is to pick and choose securities that can beat the market return. For their service and time, they typically charge you 1%- 2% of your account balance annually.

    Fund manager doing analysis in an actively managed fund

    This is irrespective of the performance of that fund. So, even if the stocks they chose in the fund are not performing well and your account balance goes down, you still have to pay the fees annually.

    This 1%-2% fee might seem low but if you have a bigger balance, then this will eat into your invested money over time.

    Also, historically, the data shows that most of the time these fund managers are not good at beating the market. This means that the stocks that they cherry-pick do not give you better returns than the broad-based market index such as the S&P 500 index.

    Mutual funds also have some holding restrictions in terms of the minimum duration of time you need to hold the fund.  There could be a penalty if you sell it before that time depending on the type of mutual fund.

    Let’s look at index funds now!

    An American investor, John Bogle created the first index fund that mirrored the S&P500 index in Dec 1975. He believed in a long-term investing strategy over day trading and speculation. He also didn’t like paying high unwanted fees to mutual fund managers. So, an index fund was a perfect solution!

    Thus, unlike traditional mutual funds, Index funds are passively managed funds. They just track a certain market index such as S&P500, Dow Jones Industrial Average, or some other index. This is how they got their name index funds. Simple, right?

    The index fund mimics a market index and is a form of lazy but worthwhile investing

    Index funds buy and sell securities based on the index they copy. So, their portfolio will reflect any type of change in the index they follow.

    Here, I would argue that for a beginner investor, an index fund would be a better choice for many reasons. Even investing experts like Warren Buffet favors index funds.

    Advantage of an Index fund

    First, they are very well diversified because they invest in all the stocks that make up an index.

    Another advantage of investing in index funds is that they are passively managed and have incredibly low fees. Vanguard S&P 500 index fund has fees as low as 0.04%. The main reason for that is you don’t have to pay the brokers and research analysts to pick and choose companies to invest in.

    Data has shown that Index funds are less volatile and give decent returns over the long run compared to individual stocks. Thus it makes sense to make these the main part of your portfolio, especially for retirement accounts like 401k and IRA.

    You know what is really cool about index funds is that they allow you to do automatic reinvestment. You can set up a monthly recurring deposit from your bank account to the fund. This is a free automated feature and goes well with the dollar cost averaging strategy of investing.

    Are there any disadvantages of index fund?

    The only limitation of index funds is that some of them like the Vanguard 500 index fund VFIAX have a minimum requirement of $3000 for investment.

    But a lot of other options like those from Charles Schwab and Fidelity index funds don’t have any minimum constraint.

    VFIAX is one of the most popular index funds. As S&P 500 stock market index is a widely recognized benchmark for US stock market performance. Rather than looking at individual companies’ performances, you can simply look at the index direction, whether it’s going up or down.

    Here are the top three S&P 500 index funds I found that you can check out. You will find expense ratio and minimum investment requirements, dividend yields, and 5-year trailing return comparison.

    Moving on to the newest category of funds, the exchanged traded funds or the ETFs.

    Exchange-traded funds have features of both index funds and stocks. They were first created in the 1990s.

    ETFs like index funds can mimic a variety of indices such as the S&P500 or medium or small companies indices.

    The added feature of ETFs is that they trade on a stock exchange. However, these are still usually passively managed like index funds.

    Also, you don’t need a large amount of money to start investing. You only need enough to buy an ETF for the price of one stock, which could be from $50 to a few hundred dollars.

    Since ETF trades like a stock, its price can fluctuate throughout the day. Depending on what time you’re buying or selling that’s the price you pay or receive.

    So the difference is the option of intraday trading in ETF versus end-of-the-day trading in a mutual fund or index fund.

    So is that even worth it?

    But this flexibility might not be good for long-term investing. The reason is that when you see the price of ETF going up and down you will be tempted to sell and buy, but this is not what long-term smart investing preaches. Most people just buy once and sell when they retire, so this added feature doesn’t help.

    Another downside if you compare them with index funds is that ETFs don’t have the automatic reinvestment feature as index funds do. You manually have to buy more shares of ETF every month which means more fees and more work.

    Also, some ETFs could also be actively managed mutual funds. Actively managed ETFs have expense ratios just like mutual funds. So actively managed ETF costs more than a passively managed index ETF.

    How do you make money from these funds?

    So how do we make money from Mutual funds, index funds, or ETFs? Just like stocks do, through dividends and or capital appreciation. So if you sell your fund for more than what you bought, you’ll make money. You’ll also benefit if the securities in your fund pay dividends or interest.

    Which type of fund is the right choice for you?

    To summarize, first, we only had mutual funds, which gave everyone this convenience and diversification of pooled investment.

    Then came the index funds, which are passively managed mutual funds and mimic an index. Index funds, over the long run, actually perform better than actively managed mutual funds. Also, index funds have much lower expense ratios and fees.

    Remember, all index funds are mutual funds, but not all index funds are mutual funds.

    Lastly, we have the ETFs which have everything an index fund does with an added option of intraday trading. However, ETFs don’t have an automated option for reinvesting and you have to manually do it every time.

    From a tax point of view, mutual funds incur more taxes than ETFs.

    So out of three options, my choice would be to invest in an index fund. But I would still recommend you do more research before you make any investment decision.

    Last but not the least – Hedge funds

    Before closing, I want to quickly go over Hedge funds with you. Hedge funds originally were aimed to hedge risk but now have become high-risk high return types of actively managed funds.

    Also, they are mostly meant for institutional investors and rich people. This is because their minimum requirement for investment is a huge amount of money. Most of us will not even qualify for an investment in a hedge fund.

    So there you have it, my friends, your must-have knowledge of different types of funds to begin or improve your investing journey. I hope you found this information useful. Please share your feedback in the comment section below.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice on an individual basis. 

    Credits: Images from https://www.freepik.com

  • Where do I invest and when do I start?

    In my previous post, I wrote about the various types of assets you can use for investment. To have a diversified portfolio, you should invest in a variety of assets.

    Diversification can mean two things:

    The first is diversifying within the same asset class.
    The second is having different asset classes in your investment portfolio.
    We all need a diversified portfolio

    So, for example, if you are investing in fixed-income securities, you need to invest in different types of those such as government bonds, corporate bonds, CDs etc.

    Similarly, if you are investing in stocks, you should invest in multiple companies from different industries and sectors. But when you invest in individual company stocks, you may only be able to invest in 5, 10, or maybe 15 companies.

    To achieve diversification using individual stocks, you will need to do a lot of research and invest a lot of money buying stocks from different companies in different industries.

    Thus, if stocks comprise a majority of your investment portfolio, then your investment is risky because it is based on the performance of those companies you bought shares of.

    So what’s the solution?

    For a beginner investor, who doesn’t want to put too much money in several individual stocks, the best way is to start with investing in an index fund or a passively managed mutual fund.

    What’s an index fund?

    Index fund is a fund whose portfolio are built to mimic the constituents of a stock market index. The most widely used indices in the US are S&P 500 index or Dow Jones Industrial Average, or the Nasdaq Composite index.

    Generally, Index funds should give you the same return as the index they follow. These funds buy all the stocks that are part of the index in the same proportion. So, it is like you have invested a little bit in each of those companies that comprise that market index. So yes, that would give you a very well diversified investment portfolio.

    Also, index funds are less volatile and therefore are a good investment compared to individual stocks, esp. for long-term investing. So, they are a great option for investment for your retirement.

    In my next post, I will argue why I like index funds more than actively managed mutual funds. I feel if you are sticking to read my post this far, you will be interested to know more.

    Don’t put all your eggs in one basket!

    The main point is to diversify so that if one sector or asset class doesn’t perform well, you don’t lose all your money.

    The second key thing for diversification is having different asset classes in your portfolio, such as stocks, bonds, real estate, commodities, etc.

    This brings us to the concept of asset allocation. Asset allocation simply means you decide what percentage of your money you want to put into each type of asset class.

    Asset allocation will vary from person to person, depending upon their savings, age, risk tolerance and financial circumstances.

    Finance theory suggests that generally, your investment in stocks should be 100 minus your age. So, if you are 25 years old, it should be 75% stock and 25% fixed income.

    So yes, it means you need to keep changing your asset allocation as you grow older. Later in life, your investment in stocks should be less, and high in other fixed-income assets.

    Now comes the million-dollar question.

    When should you start investing?

    The easy answer is now if you haven’t started already.

    You can start investing as early as when you first start earning. Even kids can start investing their allowance money and add to it periodically.

    Time plays a huge role in making your money grow, more than the dollar amount you invest. This is due to the power of investing!

    Your money grows overtime exponentially!

    If you are not convinced, you can take a look at my post here, where I explain this concept by using some simple examples.

    How much money do I need to invest?

    In the past, you would need a substantial amount of money to start investing. But things are much more simple now. With no minimum, no commission brokerage accounts, and fractional ownership of shares, you can start investing with as little as $10 a month.

    You can set aside $1-$5 a day and make monthly contributions of $30-$150 a monthly.

    These are some of the top brokerage firms in the U.S. – Charles Schwab, Fidelity, TD Ameritrade, and Vanguard. Stay tuned for my post on how to open a brokerage account!

    I hope you found this information useful, I will cover Real estate and commodity investment in another post! But this is useful info to start investing now.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice on an individual basis. 

    Credits:

    Images- https://www.freepik.com

  • Investment basics, you should know: part 1

    After we have established 6 months’ worth of saving in a bank for our emergency fund, what do we do with our remaining savings? Finance experts will tell us that if we want our money to grow, leaving the extra money in a bank will not take us anywhere. So, the best strategy is to invest your extra money.

    Now the question arises, without proper financial literacy, how do we know where can we invest our money? In this post, I will tell you some of the asset types where you can invest your money.

    Also, you will learn why diversification is very important for investing. By diversification, we mean, having a variety of assets so that if one asset doesn’t do well, you don’t lose all your money. This will also allow you to minimize risks from fluctuations in return from each asset class.

    Let’s begin by understanding an asset class!

    Asset class means a group of assets that display similar features. These assets will have similar risks and give you similar returns. They are also usually subject to similar tax laws.

    There are several types of asset classes, such as

    • stocks or equities,
    • fixed income assets (bonds and CDs),
    • mutual funds, ETFs
    • Cash and cash equivalents like money market funds
    • commodities like gold and silver, oil, etc
    • real estate (property)

    Asset class and allocation are very important concepts in investing. They help you diversify your investment, so you can have a well-balanced portfolio. I will cover more on asset allocation in another post.

    In this post, I will cover the first two types of assets

    Stocks

    Stocks are the shares in a company. People who buy a company’s stock actually get a share of ownership in that company. Companies typically issue their stock in the Initial public offering (IPO) to raise money (capital) for its growth.

    Stocks or shares mean the same and I am using them interchangeably throughout this post. Similarly, you can either say stockholders or shareholders, they are the same.

    When we buy stocks, we get payments in the form of dividends. When the company is doing well and earning profits, it pays its stockholders a share in the profit called dividends.

    Another way we get earnings from stocks is when the share price of that company increases, also called capital appreciation. This could be due to the company’s good earnings or any positive news in the company. The company’s share price reacts to the news as the market values its worth more now.

    Is there a safer way to invest in stocks?

    The answer is yes if you follow certain rules.

    The first thing to understand is that finance theory and the supporting research show that no one can beat the market. Even seasoned investors, like, Warren Buffet don’t recommend cherry-picking a few stocks, esp. for someone who is not a very risk-taking person.

    A company’s shares can fluctuate a lot due to various reasons. People who think they can predict a company’s performance and hence its share price doesn’t know finance theory that well.

    Most of the time, people don’t have enough time to research individual companies. Also, investing in a variety of companies to make a truly diversified portfolio may require a lot of money.

    A good strategy for a new investor is to invest in an index fund that mimics the market such as an S&P 500 in the US. An index fund is a type of mutual fund that buys all the stocks that make up the market index in the same proportion. So, the money that you earn from investing in an index fund will be very similar to the return on the index it mimics.

    Another key feature of Index funds is that they generally follow a passive, rather than active, style of investing. This means they maximize returns over the long period by not buying and selling securities very often. 

    Because index funds are diversified, you don’t lose money when some stocks don’t do well. Index funds mimic the market and are less volatile and over the long term (like 10 years or more), they give good returns. Don’t put all your eggs in one basket rule should be the most important thing to follow when investing.

    The second way to minimize risks is to use a strategy called dollar cost averaging, where you invest a fixed $ amount every period, monthly, weekly, etc.

    I didn’t want to make this post super long that you loose interest, so if you want to learn about dollar cost averaging, you can read my post here.

    Let’s quickly turn to our fixed-income assets. The first one is bonds.

    Bonds

    Unlike stocks, if you buy a bond of a company, it doesn’t give you ownership in that company. Bonds are actually a loan a company takes to raise capital.

    Both individual companies and the government need to raise money and thus, issue bonds. Thus, when we buy bonds, we get interest payments on the money we loan to a company or the government. Along with interest payments, at the end of our loan period called “term”, we also get our Principal amount back. 

    Bonds are part of fixed-income investments. As the name suggests, they give a fixed amount of income with regular interest payments until maturity.

    Other fixed income assets include Certificates of deposits (CDs), municipal bonds, t-bills and t-bonds.

    Just like stocks, we can invest in fixed-income securities directly, or through Electronically traded funds called ETFs and mutual funds or index funds.

    As a bond owner, you bear less risk and you will get the interest amount, irrespective of how the company performs.

    Thus, a good part of owning a bond is that, if a company does bad and goes bankrupt, the bondholders still will get their money back. The company can pay them by selling their assets such as their buildings, factories, etc.

    However, this is not the case with shareholders. During bankruptcy, the stock price of the company crashes to a very low mark, and shareholders could lose all of their investments.

    Treasury bonds are considered very safe investment options. It is like lending money to the US government.

    Stocks usually pay more than a bond, but owning a stock is riskier than owning a bond. So, your decision to invest in stocks or bonds should depend on how quickly you want to grow your money and how much risk you are willing to take.

    So which one should we invest in?

    The answer is in everything. We all should have a diversified portfolio, consisting of stocks, bonds, and other assets, like commodities, real estate as well. Although this post covered investment in stocks and bonds, we can have a portfolio with more types of assets.

    Your age and risk tolerance will determine the percentage of each asset you should keep in your portfolio. For younger people, investments in bonds shouldn’t be the main part of the portfolio, simply because they don’t pay as much as stocks do.

    However, as we approach retirement age, our ability to bear risks falls. So, more investments in fixed-income assets like bonds, should be done later in life.

    I hope you found this post useful. Stay tuned for my next post on asset allocation and diversification.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice. I recommend you consult a qualified financial advisor to make investment decisions.

  • Saving vs Investing

    What is saving?

    Saving is the extra money we are left with after meeting our expenses from our income. It is the difference between our total income and our total expenditures.

    There are several things we can do with that extra money. We can either leave it at home (the worst option) or keep our extra money in a bank, such as in a savings account or invest it.

    In this post, I will cover how much money we should save in a bank vs investing it to grow it.

    Advantages of having a savings account in a bank

    First, and foremost, we need to understand money loses its value over time because of inflation. So, even though the interest paid on a savings account is not very high, we still get some interest to compensate for loss happening from inflation. Thus, it is certainly better than keeping it in your house, as you don’t earn any interest when you keep it at your house and will lose its value due to inflation.

    However, the best part about a savings account is that your money is safe in a bank, as most commercial banks in the US are insured by FDIC. FDIC is Federal Deposit Insurance Corporation that insures that will not lose their money if that bank goes bankrupt.

    In other words, people who deposit money in a savings account protected by FDIC for up to $250,000.

    So, when looking for a savings account, make sure your bank has FDIC insurance. Also, if you want to select a bank for a savings account, you should look for one that charges the minimum fee for you to hold an account.

    Another important use of keeping money in a savings account is that you can withdraw it for expenses such as a down payment for a car or a house.

    Get that Emergency fund established first

    People also keep money in their savings accounts for emergencies. I strongly feel everyone should create an emergency fund. If something were to happen to our income, we should have at least 6 months’ worth of money to survive.

    So, keeping money in a savings bank doesn’t make you rich, but it helps in creating an emergency fund and meeting some big expenditures. So before, we start investing, we should have at least 6 months’ worth of money in a savings account for emergencies.

    This can change based on the size of the family and sometimes people need up to 12 months’ worth of expenses if the family size is big.

    Anything after that, we should invest if we want our money to grow.

    What do we mean by investing?

    In finance, investing means when you invest your extra money with the hopes to grow it. The most common forms of investment are stocks, bonds, an index or a mutual fund, commodities like gold and silver, and real estate (property).

    If you are interested in learning more about these options, you can check out my post here.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice. I recommend you consult a qualified financial advisor to make any investment decisions.