How to Invest

General toolkit for investing

price data (historical prices provided by yahoo finance/marketwatch), factor data (Kenneth French Data Library), Excel (returns, covariance matrix, regressions)

What does it take to invest?

Time, money and a budget

How much should be in your emergency funds, and then what about the rest of your savings?

6 months salary, rest of your money in stocks/bonds

Fun fact! What is the average market return per year?

10%

How to start investing...

set a (monetary) goal and figure out a time horizon (from now until when you’ll need the money by)

Generally, the more time you have...

the more sense it makes to hold a higher % of your portfolio in stocks... if less time, more bonds and cash

What do indexes do?

track the performance of a group of stocks

Dow

Comprised of 30 large U.S. companies

How are the S&P500 and Dow both calculated?

S&P500 by market cap and Dow by share prices

What industry does NASDAQ gauge the performance of?

Tech and tech stocks (Apple, Tesla, Meta etc.)

How to use indexes...

useful guides for following market trends... indexes divided into points, and as an index grows in value, the smaller the index point is on a % basis

What else are indexes useful for?

Measuring how well a stock or mutual fund is doing compared with similar investments

Eg of how indexes are useful as a benchmark

if your mutual fund returns 8% this year where the S&P500 returned 12%, you underperformed... reverse true (outperformed)

Fund definition

group of investments bundled together based on a particular strategy/sector/commodity (stocks, bonds, gold, oil reserves)

Actively Managed Mutual Funds

Run by financial professionals who select stocks/bonds/commodities etc. and manage them according to a particular strategy

Index Funds

Mutual funds that automatically match movement of actual indexes... known as passive funds since managers don’t do a lot to keep them on track (and so fees are often smaller than actively managed mutual funds)

ETFs (Exchange Traded Funds)

LIKE mutual funds BUT can buy/sell shares at any time (mutual funds only allow the end of each trading day)

Open-ended (mutual fund) meaning

when you buy a share it is created and sold to you

Closed-end (mutual fund) meaning

fixed number of shares (so investors buy/sell with each other on an exchange)... done for a more stable capital base and a fixed pool of money

Exchange-traded notes

bond with a return tied to a market index

What’s an advantage of a fund with relation to bonds?

It’s easier to buy/sell bonds if they’re in a fund)

Rule #1 of investing

Don’t buy anything you don’t understand (so hold a variety of mutual funds, index funds and ETFs!)

Mutual fund vs actively managed mutual fund

mutual fund is broad def (actively manged or passive)

Front-end load (fees)

fee charged before you’ve even invested money

Do index funds cost much to invest (fees)?

Cost almost nothing to buy

Impact of fees with regards to time

fees can do more damage the longer your money is invested

Expense ratio

cost to operate a fund ÷ average money invested in fund

Rule of thumb for your expense ratio in running a fund

For actively managed funds, no more than 1%, and for index funds and ETFs, no more than 0.5%

If you don’t understand...

don’t buy

Trading definition

selling/buying a stock/bond/other investment

Market orders

let you buy/sell a security immediately at whatever price the market offers

Limit orders

OFFER to buy/sell at a particular price (trade happens if someone meets price)

Stop orders

arrange automatic purchase/sale if a security reaches a specific price (stop order triggers a market order)

Stop limit order

combines a stop order with a limit order

Note on trade prices for market orders...

the last trade price seen on the market isn’t always the one you’ll get

When to use a limit order...

fish for a bargain without monitoring trade market (relies on someone to meet price)

When to use a stop order...

limit losses if strategy doesn’t pan out (convert to market order at a certain price floor/ceiling to prevent further losses)

In what funds can market orders ONLY be used

Mutual funds, so just stick with these Ryan!

When is tax applied to your stock earnings?

When you take the money out

Roth 401K and IRA

Money taxed in but not out

Tax-exempt bonds

not taxed since money gets loaned to governments, but bond yields are lower and you can still incur state tax

When would you invest in pre-tax accounts?

If you expect tax rates to be lower upon retirement

What is an IRA?

Individual Retirement Account

When might you invest in tax-exempt bonds vs regular bonds?

If you think the future amount you’ll be taxed is more than what the div yield can offer

In general, don’t think too heavily about tax, but what can be a smart strategy?

Put a portion of investments into tax-exempt vehicles (long-term)

Capital gain

change in what you bought vs sold your investment for

Short-term gain

investment held for under one year... income tax paid and recognized the same as a paycheck

Long-term gain

Investment held for over one year... lower tax rates than short-term

Are bond interest and dividends taxed?

Yes, income tax

Rule of thumb with regards to how long you should hold your investments for

at least longer than a year to avoid short-term income tax

What’s the advantage of 401Ks and IRAs?

They can significantly reduce tax

Fundamental analysis

Ask qs a bank would ask a company, so past revenues, management structure, expected earnings etc.

Technical analysis

Looking for patterns in investor behaviour to determine stock prices... analysis of different charts is all it is really

Resistance

price a stock has difficulty rising above

Support

price a stock generally doesn’t go lower than

P/E ratio calc

Stock price/EPS (earnings)

What does P/E represent?

How much you pay for each $ of earnings (generally used to determine whether a stock is good value)

How should a stock’s P/E ratio be considered?

In the context of its industry peers and growth rate... if you think it’s undervalued then invest in it!!

Div yield

Annual dividend ÷ share price