Investment Advice from Dad: Part 1

My Dad asked me to meet him for lunch to discuss various personal investment related topics.

I thought I would chronicle the main points of our discussions here, mainly to record my memories/reflections, but perhaps readers may find them useful, too. Please note than neither my Dad nor I are financial professionals and any ideas discussed in this series are purely personal opinion/experiences, and should not be used in lieu of professional counsel.

Here are the takeaways from our first meeting:

Stocks

• Stock investing is often one of the most risk-laden and volatile forms of investing.
• Stocks can often offer some of the highest rates of return (if the market is in your favor).
• There are two main types of stock: Common Stock and Preferred Stock. There are multiple categories of stock such as: Blue Chip Stock, High Cap Stock, Low Cap Stock, and things that function similarly (meaning equally risky and changeable) to stock such as Foreign Currency Exchange.
• Beyond stock valuation, which can decrease or increase one’s investment, stocks can also pay dividends, or a portion of the company’s profit, to the stockholder. Dividends can be used to reinvest, or taken as is.
• If you plan to put a significant amount of your funds into stocks, read as much as you can about the stock market and how stock trading works, as well as the industry (or industries) you plan to invest in. Don’t let a broker or advisor be your sole source of information.

Bonds

• Bonds are usually loans to an entity. The entity pays you back the original investment plus interest.
• Bonds are usually less risky than stocks (and often offer lower rates of return), though this depends.
• Some municipality bonds are currently facing bankruptcy (i.e., municipal bonds held by entities in California).

Diversify

• Try to have a mix of investments (e.g., some more secure, some less secure, some with higher rates of return, some with lower rates of return, etc.). This can mitigate risk and allow you opportunities for greater return.
• Try to avoid entrusting all of your investments to one source (whether that’s a broker, adviser, investment form, etc.).
• “Don’t put all your eggs in one basket.”

Passive vs. Active Investing

• Think about how much you want to monitor your money – do you want to check the Wall Street Journal or the stock market daily? do you want to put your money in vehicles where you only need to examine monthly statements?
• If you want to be active in the day to day activities of your funds, then you might consider taking on more risk (i.e., stocks).
• If you want to be passive in the day to day activities of your funds, then you might consider taking on less risk.

The Transaction

• Financiers of all kinds (bankers, brokers, advisers, etc.), make their money on the transaction of funds. To them the outcome of the investment is usually secondary to getting you to: open an account, buy, sell, trade, etc.
• Always know who is getting what – i.e., what fees will come out of your initial investment, because this is money you are paying in addition to (or included in), your investment dollars.

Exit Strategy

• Always have an exit strategy in case your investments aren’t working to your advantage.

Heart

• Look for financial professionals, or financial institutions, with your best interest at heart. Don’t be swayed by promotions, uncharacteristic urgency, or get rich claims.
• Look for proactive financial professionals – someone willing to contact you in good times, and especially in bad.
• Most investing is estimating – rarely (if ever) will someone be able to give you a guarantee. Be wary.
• Always, always, check the source of information. Reputability is key.