Transcript - The Money Drill: The Long and Short of Saving and Investng J.J.: Hi. This is "The Money Drill," and I'm J.J. Montanaro. With the help of some great guest, I'll help you find your way through what sometimes can be a money minefield. We make money matters understandable, so you can command your own financial future. Welcome to "The Money Drill." I'm J.J. Montanaro, your host. And with me today, I have Mikel Van Cleve, an advice director here at USAA, and really a jack of all trades. So, Mikel, today I've brought you in to talk about investing, investments, and that sort of thing. So as you differentiate savings from investments, it's an area where folks that are just starting off sometimes don't see the difference between the two. So, how do you explain that to folks? Mikel: To kinda start off, when we're talking about what is investing, well, basically that is taking some money and allocating it towards something, whether that's an asset of some type, an item, but with the hopes of it growing in value over time. J.J.: So, when you say allocating, you're talking about putting money in some sort of vehicle? Mikel: Correct. J.J.: All right. Now, when I think about that at a very basic level, I think about, "Okay. I put money in a savings account." So, I'm putting money in something for the future. But how do you differentiate something like that versus the investments that you're talking about? Mikel: You can save money into something like a savings account, which is typically gonna be, you know, stable, you know the money is there. If something unexpected happens, you can get a hold of it. And, really, if you have something that's, you know, maybe within the next couple years, a purchase you wanna make, like a down payment on a vehicle, you're going on a vacation, whatever the case is, you typically wanna keep that money in something that's a little more stable, and that's what we would refer to as savings. J.J.: So, you go from savings, safe, stable, accessible, short term, I guess is another word The Money Drill: The Long and Short of Saving and Investng 1 of 6
you used, to invest. So, why would somebody want to invest? I guess you're talking a longer term there. Mikel: Right. So, investing is typically gonna be for a little bit longer term goals now. How we define long term can vary, but I would say, if you're gonna invest especially in the stock side of investments, which we'll talk more about here in a minute, you typically wanna have at least a five or more year time frame. And the reason for that is that, when we invest, we're putting money into the market, and it can go up and down in value, depending on kind of what's going on in the economy or with that particular investment. And so you do wanna have a little bit longer time period, but the reason it's important to invest is we know that over time things change. When we keep our money safe all the time in something like a savings account, even though we feel like that money is safe, we are guaranteeing our self we're gonna lose money. And the way that we're losing money is to what's called inflation, right? So, over time, things get more and more expensive. And when we invest, the hope there and the goal there is that we'll earn more money than that rate of inflation so that, you know, our dollar doesn't depreciate in value over time. J.J.: If I were to ask you to break down investments into some broad categories, how would you do that? Mikel: So, when we talk about those four different categories really that you can invest in, the first one that we ll talk about is investing in stocks. So the way that works is lets say for example you invest in a company stock. What that means is that you are buying a piece of ownership in that company. If the company does well the stock could go up in value. If it doesn t do so well it could go down in value. But you ve got your little piece of pie there that you own when you buy that stock. JJ: And that is typically thought of as a fairly risky proposition, because what happens if the company goes bankrupt? Mikel: Yeah, I mean if you put all your money in that company and it goes bankrupt you could potentially lose everything that you ve invested with them. So, there is kind of a trade off there between risk and reward. The more risk you re willing to take there s the possibility you could earn more, but there is also the possibility you could lose more. J.J.: All right. So, that's stocks in a nutshell. Then we transition to something that's a little bit more difficult to understand, and that would be bonds. Mikel: Yeah. So, bonds definitely work a little bit differently, right? So, instead of buying ownership in a company, now you're actually loaning money. So, when someone issues a bond, whether it's a company, or the government, or whatever the case is, then to purchase in or invest in that bond, you're going to loan money to them, the issuer, and then they're gonna promise to pay that money back at some point along with interest. J.J.: Now, what's the difference between, for example, the government bonds you buy or loan money to the government versus some gas station on the side of the road somewhere? The Money Drill: The Long and Short of Saving and Investng 2 of 6
Mikel: Well, one of the key differences is in the risk. If you are loaning money to the government, versus, you know, some gas station on the corner, you're gonna feel different about whether or not you're probably gonna get that money back. And because of that, you would expect that, you know, the government, feeling like that might be a little more secure, may not pay as much in interest as the company on the corner that really needs to borrow that money. J.J.: And no matter who it is that's issuing that bond, essentially they wanna borrow your money, and so if there's more risk associated with lending them money, they're gonna probably pay you more interest, and it's gonna be a more risky proposition, if you will. Mikel: Right. If they want people to actually loan them the money, the riskier it is, the more they're gonna have to offer in return. J.J.: Next, we'll shift gears to cash, which is pretty straightforward. Mikel: Cash can take different forms when it comes to investing now. So, you know, you can put money in a savings account, that's cash. But there's other things we consider cash equivalents, like money market mutual funds, or CDs, things like that, not gonna earn a whole lot but are there to be a little bit more stable. J.J.: Now, what about real estate? Is that an investment? Mikel: Yeah. Real estate is really that fourth category that people can look at investing in. And when we talk about real estate, that can take on many different forms. I mean, obviously when you purchase a home, you've made an investment essentially into real estate at your home. Some people will purchase land, and then there's other ways that you can invest in real estate as well. And, really, real estate is one of those categories that's been kinda the high-risk, high-reward opportunity. So, historically, real estate has provided a great opportunity to really see some growth. But we know with that obviously comes some risk as well. J.J.: Two sides to that coin. Mikel: Yep. J.J.: All right. So, we've talked at a very high level about the different types of investments out there. Obviously, you could drill down a lot deeper, and if you're talking about stocks, talk about stocks inside the U.S., outside, different size companies, but at a high level, you've provided an overview. Now, let's transition to the theoretical idea of these different types of investments to making them a reality in your portfolio. I mean, how do people buy these investments? Mikel: Yeah. So, there are different ways to do that. And so when we talk about buying investments, you know, obviously you can work through a broker or an investment company to buy those investments, but when you're ready to buy those, there's things we look at. We The Money Drill: The Long and Short of Saving and Investng 3 of 6
can buy individual stocks or individual bonds, so with a company or with, you know, on the bond side, a municipality or government. When you do that, you're kinda putting all your faith into that particular entity. So, if I buy a company's stock, and that company does well, I have a chance to really see a big swing upwards in how much value I have in that stock. But if that company doesn't do well, it could really end up going down. But when we buy these investments individually like that, or I could invest through what's called a mutual fund, which for a lot of times for people that are just starting to invest, they're gonna look at these mutual funds initially, because when I invest in a mutual fund, I'm not putting all my money into one place. And so the way a mutual fund works is it's technically called an open-end investment company, but when you invest into that mutual fund, there is a fund manager or a team of fund managers, and they're deciding which company stocks or which bonds...sometimes it's one, or both, or kind of a mix there. But they're deciding what to invest that pool of money in that's in this mutual fund, when to buy, when to sell, all these different things. For a lot of us, when we're just starting investing, or even if we've been doing it for a long time, if we don't have the time or expertise to do it on our own, the mutual fund manager or team of managers is doing that for us. J.J.: So, when you say mutual funds, I mean, really, that's not necessarily narrowing it down very much, because mutual funds could equate to something very risky or very conservative. Mikel: Yeah. It could. So, it really depends on the investments inside that mutual fund. And so, to your point, some mutual funds are gonna be more risky, some are gonna be more conservative. So, if I have a mutual fund that's comprised 100% of stocks, and all those stocks, for example, are overseas, that's gonna be a little bit more risky than if I had a mutual fund that was purely invested in government bonds. J.J.: Right. Mikel: That will be more conservative. J.J.: So, "Read the fine print," is what you're saying. Mikel: Yeah. Read the fine print. J.J.: What about exchange traded funds? Those are something you hear a lot about in terms of a way to perhaps manage expenses and are more and more popular. Mikel: Yeah. Exchange traded funds, I guess, maybe the best way to look at those is it's kind of like having a mix. So, in some ways, it's like a mutual fund, in the sense that it's this basket of different stocks, for example. A lot of times the exchange traded funds will mirror an index. So, say, the S&P 500, for example, it will kind of mirror all the companies that are in that and their stocks. But it's going to trade like an individual stock. So, it's gonna trade on the exchanges. So, throughout the day you could buy or sell those exchange traded fund shares, and they're gonna go up and down in value throughout the day as well. Whereas with the mutual fund, when you wanna buy or sell shares there, that only happens at The Money Drill: The Long and Short of Saving and Investng 4 of 6
the close of the market, and that's when the value actually changes. So, it's only gonna change once a day, and that buy or sell is gonna happen at the end of the day. It's not actually traded on the exchange. You're actually buying and redeeming straight through the mutual fund itself. J.J.: Okay. Now, we've also seen a lot more recently in terms of managed accounts roboadvisors, services like that where somebody is playing some sort of role for you in terms of the day-to-day management of your portfolio. Mikel: Yeah. So, a managed account, you know, when we think of that, think of it like this. Even when you have a portfolio of, say, mutual funds, where you've got this fund manager doing different things, you may have more than one mutual fund, because each mutual fund's got a different objective, and it's, you know, investing in different areas of the market. So, you have to ask yourself, do you know as the investor when you should make changes, when it's a good idea to buy one fund or maybe sell out, you know, are you are you looking at the economy and different things that are going on? And if not, that's where a managed account can come in, because now you've got a team of professionals there that's managing that portfolio for you and deciding in many cases if it's a non-discretionary account, then... J.J.: When to buy or sell for you. Mikel: Yeah. Yeah. When to buy or sell for you. J.J.: Right. Now, so at this point, what we've done is we've taken a high-level look at the different types of investments out there, stocks, and bonds, and cash, real estate, then we've talked about how you might be able to buy those. Now, let's shift gears in terms of the type of accounts that are out there. So, we've talked about investments. We talked about ways to buy those investments. Now, where do those investments go? Mikel: So, we have our different types of investments, but now we wanna talk about what are those investment accounts. So, what is the wrapper, so to speak, that these investments are being held inside of? And so there's a few different options, I think. Probably one of the options a lot of our listeners are gonna be familiar with is their retirement plan they have through their employer. So, if it's military, we know they've got the Thrift Savings Plan available. A lot of folks in private, you know, sector jobs have a 401(k) available. In that account, that is the type of account, they're gonna hold those investments inside of, okay, whether it's stocks or mutual funds or whatever. J.J.: And so an IRA, for example, would be another type of account which they could have there. Mikel: Right. So, outside of an employer, right, an IRA or an individual retirement arrangement is an account that people own independently to save for retirement as well. J.J.: And then college, there's specific accounts for college? The Money Drill: The Long and Short of Saving and Investng 5 of 6
Mikel: Yeah. A couple of the more common accounts for college are 529 college savings plan. And then also we have the Coverdell Education Savings Account. J.J.: All right, Mikel. Thanks so much for being with us here today on the show. I appreciate all the information insights. Mikel: Yeah. Thanks for having me on this show. It was my pleasure. J.J.: Thanks for listening. This is "The Money Drill" with J.J. Montanaro. For more great advice, check out usaastories.com. The Money Drill: The Long and Short of Saving and Investng 6 of 6