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Investment Insights

Investment Terminology for Beginners & Where to find Help

By Trilogy Financial
February 20, 2024
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Introduction

 

Investing can be a stepping stone towards financial freedom, yet the journey begins with understanding the basic terminology. This guide aims to unravel key investment terms, explore various investment types, and delve into the long-term investment advantages, all illustrated with real-world examples and statistics. As you venture into the financial world, remember that professional guidance is available to help navigate the complexities of investing. At Trilogy Financial Services, a dedicated financial advisor can work with you to amplify your wealth and fast-track your financial independence. Discover more about how they can assist you in planning for long-term success as we delve into the essential investment terminology.

 

 

 

Defining Key Investment Terms

 

 

1. Stocks:

    • A share of ownership in a company which may yield returns through price appreciation and dividends.
    • A share of ownership in a company. Stocks have the potential for high returns, with the S&P 500 for example having a long-term average return of 11.88% per year​1​.

 

2. Bonds

    • Debt instruments issued by governments or companies that pay periodic interest and return the principal amount at maturity.
    • Debt instruments that pay periodic interest and return the principal amount at maturity. They are considered less risky compared to stocks.

 

3. Mutual Funds

    • Investment vehicles that pool money from multiple investors to buy a diversified portfolio of stocks, bonds, or other securities.
    • Pools of funds from multiple investors managed by professionals to buy a diversified portfolio of stocks, bonds, or other securities.

 

4. ETFs (Exchange Traded Funds):

    • Funds that track indexes, commodities, or a basket of assets and are traded on stock exchanges like individual stocks.
    • Like mutual funds but traded on stock exchanges like individual stocks.

 

5. Dividends:

    • Payments made by companies to shareholders from earnings, usually on a quarterly basis.
    • Dividends are not guaranteed by companies to shareholders

 

 

 

Exploring Investment Types

Different types of investments cater to varying risk appetites and financial goals. In 2020, 35% of respondents believed real estate to be the best long-term investment, followed by the stock market​2​.

1. Growth Stocks:

    • Companies expected to grow at an above-average rate compared to other firms.
    • Examples: Amazon (AMZN), Nvidia (NVDA), and Tesla (TSLA) have shown substantial growth over the past decade​1​.
    • Companies like Amazon, Nvidia, and Tesla are examples of growth stocks that have shown substantial growth over the past decade​3​.

 

2. Value Stocks:

    • Companies trading below their intrinsic value based on fundamentals.
    • Examples: Exxon Mobil (XOM), Johnson & Johnson (JNJ), and Verizon Communications (VZ) are considered value stocks​1​.

 

3. Dividend Stocks:

    • Firms that have historically returned a portion of their earnings to shareholders through dividends.
    • Examples: AT&T (T), Walgreens Boots Alliance (WBA), and 3M (MMM) have high dividend yields​1​.

 

4. Bond Investments:

    • Bonds are considered less risky than stocks and provide fixed interest payments over time​1​.
    • Bonds are essential for balancing a portfolio and are generally considered less risky than stocks​3​.

 

5. Mutual Funds and ETFs:

    • These funds provide diversification and professional management, making them suitable for long-term investors​1​.

 

Advantages of Long-term Investments

 

Long-term investments, typically held for five years or more, allow the benefits of compounding to significantly enhance the value over time​4​. It's important to understand your risk tolerance when it comes to determining your investment portfolio such as the amount of money you want for your retirement account and what investments in stocks might yield the higher returns and market capitalization you are looking for in your broader financial goal.

 

Why Long-term Investments Are Valuable:

 

  • Compounding:
    • One of the most compelling reasons for long-term investing is the benefit of compounding. When you reinvest the earnings from an investment, those earnings can earn more over time. The longer the investment horizon, the more substantial the compounding effect.
  • Reduced Impact of Volatility:
    • Short-term market volatility can significantly affect investment values. However, long-term investments tend to smooth out these short-term fluctuations, potentially leading to more stable returns over time.
  • Tax Efficiency:
    • One common advantage of a long-term investment is that they often enjoy more favorable tax treatment compared to short-term investments, which can enhance net returns.
  • Diversification:
    • Long-term investments allow for diversification, spreading out risk across different asset classes or sectors, which can lead to more stable returns over time.

 

Delving into Case Studies and Numbers:

 

  • Warren Buffett:
    • Warren Buffett is a quintessential example of a long-term investor. His strategy of buying and holding quality stocks has led to significant wealth accumulation over decades. His approach exemplifies how a disciplined, long-term investment strategy can lead to substantial financial growth.

 

  • Growth of $10,000 Investment:
    • In the scenario provided earlier, a $10,000 investment growing to $33,618 over 20 years with a 7% annual return showcases the power of compounding. The formula to calculate future value is FV=PV(1+r)n
      • Where:
        • FV is the future value of the investment.
        • PV is the present value or initial investment amount ($10,000 in this case).
        • r is the annual interest rate (0.07 in this case).
        • n is the number of years (20 in this case).

 

 

  • Investment in Growth Stocks:
    • Companies like Amazon, Nvidia, and Tesla have shown remarkable growth over the past decade, often outperforming the broader market. The ROI (Return on Investment) is calculated as:
      • (Final Value of Investment – Initial Value of Investment)/Initial Value of Investment)×100
      • (Final Value of Investment – Initial Value of Investment)/Initial Value of Investment)×100. Their high ROI illustrates the potential returns available from investing in growth-oriented companies over the long term.

 

 

  • S&P 500 Long-term Average Return:
    • The long-term average return of 11.88% for the S&P 500 illustrates the potential for growth over time when investing in a diversified portfolio of large-cap US stocks. It also reflects the historical resilience and growth potential of the broader market over extended periods.

 

 

 

Conclusion

Understanding investment terminology and exploring various types of investments are crucial steps toward achieving financial growth. As illustrated through real-world examples and reinforced by compelling statistics, long-term investments offer a pathway to potentially grow wealth over time. However, the realm of investing can be complex, and making informed decisions is vital for financial success. If you are looking to make well-informed investment decisions, consider speaking with a financial advisor at Trilogy Financial Services. With the help of qualified professionals, you can navigate the financial complexities that may be hindering your wealth amplification journey. Trilogy Financial Services offers a range of financial services including 401k Retirement Planning, Wealth & Asset Management, Estate Planning Strategies, Investment Strategies, College & Education Planning, and Insurance Services, all tailored to help you achieve your financial goals​1​.

Instead of spending years mastering finances on your own, partnering with those who have already traversed the financial landscape can fast-track your financial success. A dedicated financial advisor from Trilogy Financial Services can work with you to make your money work smarter and harder, simplifying the financial intricacies that have been keeping you up at night. You can schedule a no-strings-attached portfolio review today and embark on a path to financial success guided by professional advisors. For more information and to schedule your consultation, visit www.trilogyfs.com/yourmoneyamplified. With the right knowledge and professional guidance, the journey of investing becomes an exciting venture towards pursuing financial security and growth.

 

 

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Impulse Spending and Credit in Our Immediate Gratification Society

By
Jeff Motske, CFP®
March 19, 2018

Do you remember Veruca Salt, the spoiled rich girl from the movie Willy Wonka and the Chocolate Factory? You know, the girl who yells at her father, “I want it now!” And her clueless, abiding father would get her whatever she wanted, which consequently did more harm than good.

Well, we all have one of those fathers. Not the one that we buy a Father’s Day card for every year, but one that we carry in our wallet. One that typically says yes to whatever we want to buy, regardless of how that may spoil our budget, or worse, our credit score. It’s called a credit card.

Please understand, I am not calling you spoiled or demanding. However, in this instantaneous age, it’s very easy to spend impulsively or unconsciously. How many of us have gone to Target to purchase one or two items and ended up walking out with a full cart? How many of us have passed some idle time perusing one of our favorite online vendors, one who may even have our credit card information stored in their system? We may have had no intention to buy when we got on the site, but when we spot a good “deal,” it only takes a few quick clicks to make it ours.

You see, it happens a lot more often than you think. Study after study has shown that people will spend more money when they use credit cards than when they use cash, sometimes as much as twice the average cost for the same item1. Not only does the method of payment affect the quantity, it can also affect quality, with consumers willing to purchase unhealthy or unnecessary items when paying with a credit card as opposed to cash2.

The convenience of clicking or swiping to purchase, rather than handing over tangible cash, has spurred on overspending and racked up national credit card debt to $905 billion3. The truth of the matter is that we have lost sight of the fact that credit cards are essentially a thirty-day loan, which is becoming more and more apparent with the younger generations. Based on Experian’s Millennial Credit and Finance Survey Report Part II, 58 percent of millennial credit card holders polled in 2015 had maxed out a credit card, been charged a late fee, had an increase in the interest rate on a credit card, had a credit card declined or had defaulted on a credit card payment4. Financial behaviors like these can wreak a lot of havoc on a young person’s credit score and financial future. Such a small, seemingly innocent looking piece of plastic can do a lot of damage.

Now I am in no way advocating a credit-free lifestyle. Not only are credit cards a convenient way to build up your credit score, but many cards offer rewards programs where users can earn discounts, airline mileage and cash back. Most importantly, though, there are an increasing amount of vendors that no longer accept cash. This is not simply limited to online purchases. Have you ever tried leaving an airport parking lot or paying to access a toll road with cash? In most places, it is nearly impossible.

What I am saying is we need to start being a bit more mindful with our money, a bit more critical of how we spend. I mentioned the perks of credit cards rewards programs earlier. How many of us, though, have actually stopped to determine how much those perks really cost once you start adding up interest and impulse purchases? If switching over to cash purchases helps us become a bit more mindful with our money, then so be it.

Before you end up with a pile of debt and regret.

1. https://www.nerdwallet.com/blog/credit-cards/credit-cards-make-you-spend-more/

2. https://www.psychologytoday.com/blog/the-science-behind-behavior/201607/does-it-matter-whether-you-pay-cash-or-credit-card

3. https://www.nerdwallet.com/blog/average-credit-card-debt-household/

4. https://www.slideshare.net/Experian_US/experian-millennial-credit-finance-survey-report-part-ii

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Life Planning AdviceRetirement Planning Advice

Financial Planning in the Age of Dementia

By
Jeff Motske, CFP®
May 29, 2018

We live in a dynamic and inspiring time. Advancements in healthcare are doing wonders for retirees. Many are living longer, in greater physical health, maintaining their mobility and independence. However, there has also been a growing impediment to that independence – dementia. This syndrome that characterizes the decline of cognitive functions and encompasses degenerative diseases like Alzheimer’s, Parkinson’s and Huntington’s is impacting more and more every year. While it can be very uncomfortable to consider yourself or a loved one suffering from such an illness, living in this age of dementia makes planning for its onset a necessary endeavor.

The statistics are sobering. Those who are diagnosed with Alzheimer’s disease can typically live four to eight years after the initial diagnosis. However, there are also those who can live up to twenty years after their first diagnosis. As this is a disease that wrecks the mind, not the body, some can live up to 5 years in long-term care, rather than the typical two years of other illnesses. Needless to say, the costs of care can be staggering. With expenses ranging from various prescriptions, personal care supplies, limited or long-term care services, there is clearly a lot to plan for. Many rely on Medicare to cover the expenses. Yet, Medicare does not cover everything, oftentimes paying up to 80% of costs, only covering fees that are considered “medically necessary” and taking time to determine what falls under that qualification.1 When you or your loved one is struggling daily with the complications of dementia, hope can seem far off or entirely out of reach.

Due to the subtle ways symptoms can first appear, many can go years without a diagnosis. Unfortunately, that does not mean that the illness is not affecting their lives. While there are specific stages of decline with various forms of dementia, financial matters are generally impacted immediately. Memory suffers, with individuals forgetting to stay current with their bills or having issues understanding their bank and account statements. With subsequent stages, financial skills, along with others, decline further. It can be a rapid and steep decline. An individual’s independence, financial and otherwise, can be compromised very quickly.

This is why it is very important to discuss financial and legal matters once a loved one has been diagnosed, regardless of whether it may feel awkward or uncomfortable. The sooner these conversations take place, the better. There is a lot of information to cover and a lot of decisions on the possible future to make. Most importantly, the earlier the conversations are started, the more of a role the diagnosed person will have. At the end of the day, that is what we all want, for our loved one's wishes and desires to be upheld, even when they may no longer be able to vocalize them.

In addition to helping our loved ones afflicted with these diseases, we cannot forget the loved ones providing the assistance. The strain that can get placed on a familial caregiver can often get overlooked. If not adequately planned for, some will dip into their savings and sell their investments to cover the mounting costs to care for their loved ones. Additionally, the stress of the situation can detrimentally impact the physical and emotional health of the caregiver, which can put both individuals at risk.

Clearly, there is a lot to consider, and for many, it is easy to get overwhelmed, flounder in all the unfamiliar information and overlook that which we are not well-versed on. This is where your financial professional can assist you, both in the midst of this difficult time and also well before the actual diagnosis. They can help you make decisions and preparations, as well as educate you on the myriad of things you may not be aware of but need to know. Additionally, Trilogy Financial advisors are trained to not only identify when clients may be exhibiting symptoms of dementia but to continually monitor these behaviors as well. We truly do take our clients’ well-being seriously. Many individuals I have encountered have two distinct fears about growing older. The first is running out of money. The second is becoming a burden to their family. With dementia, those two fears can become a reality. However, with the proper preparation and planning, they don’t have to be.

Sources: 1. https://www.medicareresources.org/faqs/what-benefits-does-medicare-provide-for-alzheimers-patients/

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