Everyday Finance and Economics with the Siglers

EP 04: Investing? What? Part 2

April 27, 2021 Glenn and Christina Sigler Episode 4
Everyday Finance and Economics with the Siglers
EP 04: Investing? What? Part 2
Show Notes Transcript Chapter Markers

Hello! and welcome to Everyday Finance and Economics with the Siglers! The podcast where we discuss what you need to know about personal finance and economics and give you practical advice on how to get started and be smart with your money.


This episode is the second installment in our investing series. Glenn and Christina dive into the world of derivatives, diversification, and the risks and reasons involved in investing. Join us next time for the third and final part of our investing series, where we answer common questions!



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Intro music: 

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Speaker 1:

Hello, and welcome to everyday finance and economics with the sicklers the podcast where we discuss what you need to know about personal finance and economics, and give you practical advice on how to get started and be smart with your money

Speaker 2:

Where your hosts Glenn and Christina Sigler. So Christina, what's going on in the economy this week,

Speaker 1:

What matters this week and probably for the foreseeable future. Dad is semiconductor chips. They are in every electronic product from bones to cars, to TVs and game consoles. Every, every electronic product you have. And there aren't enough of them. At first, it was just a temporary delay in supplies at the beginning of the pandemic, you know, as, as there was with a lot of products, but since people have been demanding more electronic devices since they've been staying at home. So even though now production is back to normal, there still aren't enough chips for demand because demand has just gone up for them companies that use these ships. And there are a lot across, a lot of different sectors are having to delay the launch of products or even cut back on production altogether. The economic term for this week is the sec. It's an acronym and it stands for the U S securities and exchange commission. It was founded by president Franklin Roosevelt after the stock market crash in 1929 to help restore investor confidence in the stock market. It's an independent agency of the federal government and has three main goals, protect investors, maintain fair and orderly markets and facilitate capital formation, which basically means encourage assets like cash to be invested instead of being used for personal consumption. All right. We have another part of our investing series here for you today and let's get into the episode.

Speaker 2:

Alright so to recap. So yeah, there's lots of stuff and we've covered many of them. We've covered stocks, we've covered bonds, we've covered ETFs. Um, there's some slight differences between retirement investments versus non retirement investments and in the United States, uh, the, one of the big issues with that is, uh, for retirement advantage, uh, investment, you, you can invest in a lot of the same things, but you get a tax advantage because you can have money put into a mutual fund or, or ETF or whatever you're doing, and you can have it done pre-tax and, um, you won't be taxed on that money until you decide to take it out. Yeah,

Speaker 1:

We learned about this in financial

Speaker 2:

And then the other side of that, there, there are, uh, other, uh, uh, investments called Roth Roth, 401ks Roth, a Roth IRA where you can put the money in after tax and then not get it, and then not, not, not get taxed on any payout. And so there's different strategies that you use based on your income level, you know, that you use a Roth or non or not a traditional 401k or IRA. Um, you know, so retirement funds retired investment funds. Again, we we've gone back over those. Those are the non tax advantage, uh, bank products, certificates of deposit, money, market savings. Uh, those are those types of products, cryptocurrencies, which we've talked about before Bitcoin doge coin, things of that. Um, and then derivatives, we've talked a little bit about derivatives, uh, when we talked about futures, um, but derivatives are really, um, assets that are valued based on another asset. Ooh. And so that's what a futures contract is and that's what options are. Um, um, it's, you know, an option for, I want an option to buy, um, Amazon stock three months from now at a, you know, at a price of, you know,$300. Oh,

Speaker 1:

This is like, okay. So if we're going to like it, this to something else layman's terms, right. You're betting on someone else's bet.

Speaker 2:

Yeah, yeah, yeah, yeah. Okay. You're betting that, that, you know, so the difference, uh, so a future is an obligation to you. You have a contract to buy or sell, depending on which side of fugitive, uh, yeah. At a specific time and date in the future of, you know, a hundred barrels of oil, that's a futures contract and option is the right to buy a, the option. Yes. You have the option because there's something called being in the money being added, the money, save you say, I want an option to buy Amazon, uh, three months from now at$300 today to prices$250. And so you're betting that it will go up and you're betting that it will go up a lot. That'll be more than$300, but if it's not more than$300, why would you buy yeah, you wouldn't. And so you're going to pay that, that right. To buy costs a little bit of money doesn't cost as much as the entire stock, but costs a little bit of money.

Speaker 1:

This is interesting.

Speaker 2:

Okay. So, so those are options and there's options to buy and there's options to sell. Um, and, and then there's things also derivatives called swaps and what, uh, so when we talk about the debt instruments, um, the bonds, the bonds and stuff, so say, I ha I need a steady fixed rate for, for my business. And you have variable rate stuff, uh, or excuse me, you have fixed rate stuff and I have variable rates up, but I need to swap it out because something's changed in my business. You and I can, we can, you and I can swap instruments

Speaker 1:

When you talk about fixed rate and very you're talking about the interest rate. Okay. So fixed interest rate and variable interest rate, and we need to swap because something happened to me.

Speaker 2:

I, I see my business becoming, uh, either more, you know, based on, you know, depending on what side I'm on, I, my payments need to be either more stable or they have a lot of movement and they move with what you move in the way that your instrument works. And so I will work out some sort of swap with you to change, you know, to change, you know, how my, how my revenue stream is coming in so I can match what I need.

Speaker 1:

Right, right. Okay. Okay.

Speaker 2:

It's it's so think of it as a way to exchange one kind of cash flow for another, a steady stream for variable stream of payments.

Speaker 1:

Okay. Okay. That makes sense.

Speaker 2:

Right. And that, and those are the, the, the five minute answer on derivatives.

Speaker 1:

Whenever answer. Yeah. We could honestly have a whole answer or a whole episode on derivatives. It's too complicated, honestly. All right, dad, let's get into some questions now that we know all the terms and the lingo terms, and we know enough of the terms of the lingo to get around. All right. All right. There's 700 years worth of lingo in investing. We do not have time for that anyway. All right. Simple question. The basis of all this, why should I invest? What is the benefits?

Speaker 2:

Okay. Investing helps you make your money work more for you. You know, you can, there's lots of things you can do with your money. You can spend it and get an immediate benefit of what you buy, but does that help you reach some of your longterm goals and objectives? Let's say that you want to buy a house. Well, you're not going to, you're not going to be able to buy a house if you spend all your money and don't have money for having anything saved for down payments. And, and, and, and that come with that. So by investing your money, you put your, that those funds to work in, in assets that can compound and compound at a faster rate than just keeping them in your mattress at home or in your cookie jar, or sometimes even more than a savings account. Yeah. Compounding means that the money that you put away, not only does it earn some gain, but if you keep it in there over time, the earnings makes earnings and that allows your funds to grow, uh, much more rapidly.

Speaker 1:

That seems useful. That seems useful. All right. How, how much risk is involved in investment? Cause I know we said that was the main difference between like a savings account and investing earlier, right.

Speaker 2:

And can span a wide range of risk. Some investments have a very wide range of volatility. Let's just think about, um, gain the price of GameStop over,

Speaker 1:

Wait, hold on, hold on, hold on. Volatility means

Speaker 2:

Price, movement up and down. Um, we'll just keep it that way. Price movement up and down could be high. One day could be low the next day. If you think, look at the story of the stock game stop a few months ago, um, it was worth like$4 a share. And then it went up to

Speaker 1:

400, a moon GameStop to the moon.

Speaker 2:

Or even if you want to talk about Bitcoin, Bitcoin, Bitcoin has been 20,000 back, the 40,000 and now is up to 60.

Speaker 1:

Right? Crazy. And so a lot of movement

Speaker 2:

That is a lot of fluctuations. Some people don't like that kind of fluctuate[inaudible] um, they, they liked the upside and who wouldn't, but they have a hard time sleeping with the downside. And so, uh, you have to understand your ability to tolerate swings and each type of investment has its own certain risks. You know, even across stock classes, there are certain stocks that w w um, swing wildly versus others that really don't swing at all. Like utilities, well, utilities, utilities, don't don't swing a lot, but then you've got something like, um, any new and emerging technology stock and that could swing wildly.

Speaker 1:

Yeah. Even Tesla has a lot of movement. So they're hearing is understand what you're doing, right? Like what you're investing in and ask yourself before, can I tolerate this amount of price fluctuation? Yeah, absolutely.

Speaker 2:

And yeah. So understanding, accepting, and in certain cases, like with the options, uh, managing the risk and reward for each investment is part of the process of investing. Okay.

Speaker 1:

What is diversification and why is that important?

Speaker 2:

Okay. So I'm going to start with the, uh, an old saying, you've heard the phrase, don't put all your eggs in one basket. Yes. So why is that? Because if you fall that you got your, all your eggs in one basket and you fall, you've broken all, all your eggs. You've got, you got nothing left. So if you put your eggs in different baskets and you know, two or three fall, you still got other eggs. Yep. Okay. Okay. The versification is a tool of investing in different types of companies, different types of assets at different durations. So that if something happens that impacts one part of your portfolio, it doesn't wipe out all of your portfolio. Okay. And so when we talk about diversification, we're really talking about the versification of the risk. You don't want to minimize risk, right? So you don't want all the assets to have the same kind of risk. Now, there, there, there are some folks that invest out there say, yes, I believe in this company or this industry, and I'm going all in. And you know, when they're right, they can, you know, they can reap a lot of reward, but when they're wrong, they're going to be wrong. And so again, you're going to have to get a handle on what's the right diversification for me. Um, and, and depending on how much you're going to know and study that, that company or that industry, or that asset, how much risk you're willing to take, how much diversification you need around that.

Speaker 1:

All right. That's our show. Our second part in our investing series, be sure to join us again. Next time when we round out the series with the third part, and if you have any questions for us at all, you can email us@efespodcastatgmail.com and follow our Instagram at EFCs podcast. Thank you so much for listening. Take care, everyone.

Introduction
Economic News
Economic Term of the Episode
Types of Investments Recap
Derivatives
Why should I invest?
How much risk is involved in an investment?
Why is diversification important?
Outro and contact information