The Money Tree (and Other Basic Investing Principles)

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 Stacie Carrabine By: Stacie Carrabine

How old were you when you first started seriously thinking about money? For me, it was when I was eight, based on “The Money Tree” book that I “authored” for a third-grade assignment.

We were all introduced to money at some point in our lives, and along the way, it’s had an impact for worse or for better. It’s important to continually build upon that foundation (and, in my case, come to terms with the fact that money doesn’t actually grow on trees!).

1.  THREE BUILDING BLOCKS FOR YOUR INVESTING LIFE:

  • The difference between saving and investing is dramatic. If you are only saving in a savings account, on average, you’re earning a 1% return. This doesn’t even put you on pace to keep up with inflation, which has historically been about 3% going back to 1926. On the other hand, investing in the U.S. stock market has provided an average annual return of 10% going back to 1926. This figure even includes both the Great Depression and the 2008 Financial Crisis.
  • All investing involves risk, but you have control over how much risk you take. The decisions you make around what is the right mix of bonds and stocks can help set you up for long term success.
  • The earlier you start saving, the more money you’ll have later, thanks to compounding. Your money is working for you over time, and even that small amount you invested a long time ago can grow significantly.

Once you have a handle on the basics, you can expand your investing focus to other variables well within your control. Start by embracing these principles:

2.  UNDERSTAND THAT MARKETS WORK (MEANING YOU CAN IGNORE THE “HOT STOCK” OF THE DAY).

Market prices reflect all information available and expectations of the future. Just as you don’t question prices at the grocery store being right or wrong, the same is true in the markets. You might choose whether to buy or not based on the price, but you accept the price as correct.

Instead of focusing on news headlines that can incite the need for action in your portfolio, it’s better to focus on why your money is invested the way it is. There are no shortcuts for growing wealth, and to be successful, you need to stick with your long-term investment approach regardless of market movements.

3.  PLAY DEFENSE AGAINST RISK.

The global stock market offers over 10,000 available stocks, and it’s better to take advantage of investing a little in a lot of funds than to concentrate your hard-earned money in exposure to only one or a few stocks. Diversification helps to reduce your investing risk by decreasing the impact of any one company on your investment portfolio.

We have a home bias because we live and work in the United States, but if you’re only investing in the U.S., you’re leaving about half of your investable opportunities on the table. We live in such a global economy today that it’s important to have international exposure in your portfolio.

Another important part of mitigating risk is making sure that your asset allocation is properly matched to your financial life goals. The right mix of bonds and stocks will change over your lifetime as your goals do. Having exposure to bonds can help reduce the volatility in your portfolio. Even though they might go down, they behave much differently than stocks and can act as a buffer for you.

4.  KNOW WHAT YOU PAY FOR YOUR INVESTMENTS.

Your fees have a direct impact on what your investment returns will be. Some of those costs that add up over time are:

  • What you pay your advisor to manage your financial life and portfolio. Their fee should be transparent, and it should be easy to understand how they get paid.
  • The fees you pay to be invested in the funds in the form of an expense ratio. This is what goes back to the fund to cover operating costs.
  • Transaction costs. For each buy and sell decision you make there is also a cost associated to be able to execute the trade. You need to be aware of these costs, as they can add up quickly.

Investing is an important part of your financial life, but it’s not everything. Just like you can’t get a prescription without going to the doctor, investments and financial planning go hand in hand.

This post was written by a member of InspireHer, Plancorp’s Women’s Initiative, which strives to advocate for clients and women in the community by addressing topics specific to their financial lives. For more information about InspireHer and how you can get involved, email inspireher@plancorp.com.

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Disclosure:

This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

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Born and raised in Fairfield, Iowa, Stacie moved to Missouri to attend Saint Louis University, where she graduated cum laude with her BSBA in Finance. She draws on her financial and analytical background every day at Plancorp, working with the investment and operations teams to maintain portfolio balances, make rebalancing recommendations and execute trades. More »