New Stuff, Important Stuff.

iDd uncovers 7 key concepts every investor, beginner to seasoned, should know. Do you?

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Transcript

Okay. So have you ever felt like everyone around you is totally fluent in investing? Right. And you're just, you know, stuck with like a bare bones phrase book. It can feel that way for sure.
Yeah. But that's what we're tackling today. We're ditching all the jargon and the complexity. We're diving into digital reads, key rules for any investor. Love that. So get ready to decode some of the secrets of, you know, making smart money moves because today we're all about clarity and actually having some fun with this stuff. Ready to dive in. I am so ready. It's more about clear thinking than secret handshakes. That's a good way to put it.
One of the first things I think that any investor really needs to grasp is this idea of opportunity cost.
Okay. Opportunity cost. Now that can sound a little bit like, you know, we're back in business school for a second, but I think everyone can relate to this, right? Remember that time you had to choose between say that beach rotation you've always wanted to take or finally going on that like mountain getaway and you're sitting there and it's like, I can't do both. Budget, time off, you know, life gets in the way. That my friend is opportunity cost in action.
That's exactly it. Yeah. You had to pick which experience you valued more in that moment, right?
Yeah.
But by making that choice, you inevitably gave up the other. So now take that same concept and let's apply it to your money. Every dollar, every cent that you invest is a dollar, a cent not doing something else.
It's true.
This could be as simple as, you know what? I really like my financial advisor. They're a riot. We have a great time. But are they really giving me the best advice for my situation? Or am I missing out on someone with a different specialization, a different outlook because I just enjoy the banter so much?
Ooh, that's a tough one.
Because every choice, my friend, has trade-offs.
It really does.
That is opportunity cost in a nutshell.
And now I'm thinking about that, like even picking a coffee shop.
Yeah.
Like I love my little local place.
Right.
But am I missing out on like the amazing cold brew at that new spot that everyone's raving about?
Exactly.
It's the what could have been factor, right?
Precisely. That is opportunity cost.
I like it.
But let's move on to something that makes that whole, oh, what could have been feel a whole lot better.
Okay.
Let's talk about the power of compounding.
Now, this is where things get really interesting.
Okay. We're talking about your money having its own little time machine.
It's earning interest on top of interest already earned.
It's like, you know, the snowball effect on steroids, right?
Totally.
And our source, you know, they use this great little visual.
It's an L versus a U to kind of illustrate this.
Yeah.
So picture this.
Think of the letter L.
Now, that vertical line, that's your money growing at a steady, you know, consistent rate.
Okay.
That's your basic return.
Now, let's switch it up.
Imagine a U.
It's like a curve, right?
And as it goes up, it starts to get steeper and steeper over time.
That, my friend, that's compounding.
Your returns are actually accelerating because they're building on themselves.
I like that visual.
And I think one thing that makes this concept even more concrete, our source mentions this, is the rule of 72.
Have you ever used this?
Oh, yeah.
Yeah.
Surprisingly simple, but very powerful.
Basically, all you do is you take the number 72 and you divide it by your estimated rate of return, whatever that might be.
Whatever number you get, that's roughly how long it'll take for your investment to double.
So just as a quick example, if you're getting a return of, let's say, 6%, you take 72 divided by 6.
It would take roughly 12 years for your money to double.
Yeah.
Now, of course, past performance isn't a guarantee of what's going to happen in the future.
We all know that, but it just gives you a sense of the power of compounding.
That's exactly it.
And it really highlights why, even if you're starting with small amounts, starting early can make a huge E difference of the long term.
It's like planting a tree, right?
Yeah.
The earlier you get that seed in the ground your money and you let compounding do its thing, the more time it has to grow into this, you know, mighty financial oak tree.
I love that analogy. But before we get too carried away with all these, like, magical money trees blooming in our minds, there's another side to this that we have to talk about.
It's essential. And that's risk. Because let's be real, right? With all this potential for reward, there's also the possibility that, well, things might not go exactly as planned.
Right. And this is where honesty is the best policy, both with yourself and with your financial advisor.
It's not just about, like, how much risk you can handle emotionally when you see those numbers go up and down.
It's about how much risk makes sense for your whole life, your overall situation.
Right.
Your financial goals, your time horizon. This is where that whole idea of risk capacity comes in.
Okay. So I'm going to stop you right there for a second because I think it's easier to get risk capacity mixed up with risk tolerance.
You're right. Yeah. And they're both super important.
Risk tolerance is like the gut feeling, your comfort level with the ups and downs of the market.
Right. Risk capacity, though, that's a little more objective. It takes into account things like your financial goals, how long you have until you need the money, and frankly, how much you could afford to lose without, you know, derailing your plans.
It's like I might be a total daredevil when it comes to, like, trying a new spicy food, you know, bring on the ghost peppers.
Okay. Yeah.
But when it comes to my investments, my risk capacity might be a little more, you know, moderate because I've got certain goals I need to hit. Does that make sense?
It totally makes sense.
Yeah.
And our source, they have this fascinating little tidbit in there about the emotional side of risk.
Mm-hmm.
It turns out that we humans, we tend to feel the pain of a loss about two and a half times more strongly than the joy of an equivalent gain.
It's so true.
It's just human nature, right?
Yeah.
But it's something to really be aware of when you're making decisions about your investments.
It's like that feeling of when you, like, lose a $20 bill versus when you find a $20 bill on the street.
I mean, finding the money is great, don't get me wrong.
Sure, yeah.
But losing it just feels worse somehow.
It just stings more.
I agree.
So as you think about your own risk tolerance, you know, that gut feeling, ask yourself, if your investments, you know, if they took a sudden dip, like really dipped, how would you react, really, truly react?
Would it keep you up at night or would you be like, okay, this is a buying opportunity, let's do this?
It's a great question to ask yourself.
Now, before we go too deep down the emotional rabbit hole of, like, risk assessments and all of that, I want to switch gears for a second because there's another sneaky factor that I think can really impact investments and sometimes flies under the radar, and that's inflation.
Yeah.
Inflation is sneaky.
It's like that slow leak in your tire.
You might not really notice it at first, but eventually it's going to leave you stranded if you don't address it.
But our source uses treasury investments as an example, and it's a good one because those are generally seen as super safe, right?
Right.
But here's the thing.
If inflation outpaces the return that you're getting on those investments, you're actually losing purchasing power over time.
It's true.
Yeah.
It's like going to the grocery store and suddenly your favorite cereal that you've been buying for years now costs twice as much.
And you realize, okay, my money hasn't, like, disappeared, but it's not buying me what it used to.
Exactly.
What are some other ways that inflation impacts our investments, especially over, like, the long haul?
Let's use bonds as an example, right?
Right.
Imagine you bought a 20-year bond.
Put down, let's say, $50,000.
Fast forward 20 years, you get that $50,000 back.
You're like, yes, this is awesome.
This is exactly what I wanted to happen.
But here's the catch.
Okay.
Because of inflation, that $50,000 may only have the buying power of, I don't know, let's say $35,000 from back when you first invested it.
So even though you technically got all your money back, you've actually, in a way, taken a loss in terms of what you can buy with it.
That's right.
And that's why it's so important to look beyond just the number.
Right.
Don't just look at the nominal returns.
Think about the inflation-adjusted return.
Think about what your money can actually buy you down the line.
Right.
It's about the real-world impact.
Exactly.
I like that.
You know, speaking of that real-world impact, and I did find something in the source material that I thought was really interesting.
It basically suggests that sometimes the smartest investment isn't actually an investment in the traditional sense, but it's actually paying down your debt.
What are your thoughts on that?
Yeah.
That's huge.
The source actually calls it the bird-in-the-hand principle.
I like that.
The idea is this.
Something that you have for sure, like right now, is often way more valuable than something that's, you know, just a possibility in the future.
When you pay off high-interest debt, any kind of debt, really, but especially that high-interest stuff, you are getting a guaranteed return.
You're basically guaranteeing yourself that you will not be paying all that interest in the future.
Well, it's like getting a guaranteed discount on your financial life.
Exactly.
Right.
Let's say you've got, oh, I don't know, a credit card, and maybe it's got like a 20% interest rate.
If you take any extra cash that you have and use it to pay that down, you've basically secured yourself a 20% risk-free return because that is what you would have been paying otherwise.
So, I mean, that's powerful.
Yeah, and I think it does make you think twice about, you know, always chasing the next big investment opportunity when maybe, just maybe, you could be really solidifying your financial foundation by tackling some of that, you know, high-interest debt that a lot of us are dealing with.
It's all about fortifying your existing financial position before you start, you know, taking on more risk and venturing out into more, you know, unknown territory.
Finding that balance between playing it safe and knowing when to make those strategic moves for growth, right.
But no matter what path you choose, one thing is for sure, you've got to be a critical thinker.
And our source has this really great example, a little bit of a riddle, if you will.
Okay, I like riddles.
Hit me with it.
All right.
Studies show that most plane crash survivors are actually seated at the back of the plane.
So, my question to you is, does that make you want to switch your seat the next time you fly?
Oh, that's such a good one.
That's a classic example of how statistics, while they can be fascinating and interesting and maybe a little alarming, can also be very misleading if you don't big a little deeper.
Yeah.
I mean, it's so tempting to just draw a straight line from point A to point B, right?
You hear that and you think, well, I'm sitting in the back from now on.
But there's probably a lot more to the story there.
There's always more to the story.
It might seem counterintuitive, but that little statistic right there, that doesn't tell us the whole story, right?
I need more information.
Like, what percentage of passengers who survived were in other parts of the plane?
You know, was it just a fluke?
There are so many questions.
That's exactly it.
And I think it's a really good reminder to always be cautious, especially in the world of finance.
Be wary of bold claims.
Just because something sounds impressive or it sounds really statistically significant doesn't mean that it's a reliable indicator for how you should make a decision.
Always, always, always look for that full context and be ready and willing to ask critical questions.
Don't be afraid to push back a little.
Which brings us to, I think, another really crucial aspect of investing, and it's something that our source highlights, and that's fees.
They can be like those pesky mosquitoes, you know?
Yeah.
Small, but capable of inflicting a lot of pain over time.
Oh, 100%.
And again, it's that compounding effect.
They might seem tiny and insignificant in the short term.
Right.
But over time, they can really, really make a dent, quietly eating away at your returns.
The source specifically calls out annuity fees as kind of a prime example of this.
Yeah, and annuities can be confusing.
Like, there's a lot going on that can be complex with lots of, like, moving parts and different types of fees involved.
And it kind of reminds me of, like, that time that I signed up for a gym membership without really, like, reading the fine print.
Next thing you know, I'm hit with all these hidden fees and charges.
So for people who are, you know, maybe new to investing or maybe just don't deal with annuities a lot, what are some of the other costs that we need to watch out for?
Surrender charges.
Yeah.
A lot of people, they don't realize those are there until it's too late.
What are those?
What are surrender charges?
Yeah.
So it's basically like a penalty.
It's like a breakup fee for leaving your investment too soon.
Okay.
Yeah.
So if you take your money out before a certain amount of time, you're going to get hit with a fee.
And they can be hefty.
Ouch.
Yeah.
Those can sting.
I've learned to read those contracts much more carefully now.
It's a good life lesson in general.
It is.
Are there any other like red flags that we should be keeping an eye out for when we're looking at these different types of investments?
Definitely pay attention to what are called sub accounts, especially within annuities.
These are basically like investment options within a larger account.
Okay.
It's like choosing from a menu at a restaurant.
Right.
Right.
The restaurant itself might have a great reputation, but you still want to make sure that the specific dishes you're ordering are actually good.
Yeah, that makes sense.
You need to look at their historical performance because they can vary a lot.
So before you commit your hard-earned cash, do your research.
Knowledge is power when it comes to this stuff.
Speaking of knowledge, our source talks a lot about the importance of, you know, keeping things relatively simple.
And, you know, I agree.
Like I'm all for simplicity.
But I think it's also fair to say that at times finance can be anything but simple.
So how do you reconcile that?
Totally.
And I think it's a balance, honestly.
Like avoiding unnecessary complexity.
That's always a good rule of thumb in my book.
However, I don't want someone to shy away from something that could be potentially beneficial for them just because it requires a little more effort to understand.
So it's about finding that sweet spot between being appropriately cautious and being informed.
Yeah.
So it's okay to, you know, to get in some of those complex investments as long as you're doing your homework, as long as you're willing to, you know, ask for clarification when you need it.
Don't be afraid to ask questions.
Ever.
If something doesn't make sense, ask.
Talk to people.
Consult with financial professionals.
Never stop learning.
At the end of the day, you are your best advocate when it comes to your finances, your money.
Nobody cares more than you do.
It all circles back to that critical thinking that we were talking about, you know, a few minutes ago.
Don't be afraid to ask questions.
Don't be afraid to do your research and make sure that you are comfortable and confident with the decisions that you're making with your hard-earned money.
Now, before we wrap up our deep dive here, I want to touch on one last point from the source because I think it's crucial.
And it's the importance of taking action.
Yes.
Because we can sit here all day and we can talk about investing and we can talk about all these amazing concepts.
But it's like that old saying, you know, knowledge without action is kind of like a car without an engine.
You might have all the right parts, but you're not going anywhere.
It's a perfect analogy.
So, as we kind of start to wind down here, I want to bring it back to you, our listener.
What is one small step, just one, that you can take today to actually put some of this knowledge into action?
It could be as simple as just jotting down a note to yourself.
Hey, I need to research this new financial term that I've been hearing about.
Or, you know what, I'm finally going to open up that retirement account that I've been putting off.
Something small.
Well, because even those small steps, when you take them consistently, can lead to really significant progress.
Remember the snowball effect that we talked about earlier?
Well, it all starts with a single push.
You don't have to become a financial expert overnight.
This is a journey.
It's about learning and adjusting and learning some more.
It really is.
It's a marathon.
It is not a sprint.
And on that note, I think we'll leave you with this final thought-provoking question.
What is one financial decision, big or small, that you've been putting off?
And how can you maybe break that down to some smaller, more manageable steps, starting today?
Until next time, happy investing.