Lynn Habrowski is a certified financial planner with Great Lakes Welath Planning and LPL Financial. She joins Paula Christine today to cover the basics of the market and investing. We start by defining the market, stocks, bonds, and other common terms.
It's very important to know the difference between short and long-term investing, as well as the difference between investing and trading. Investing is growing your money for your future. Trading is more about the money you can afford to lose. Lynn and Paula take a deep dive on that. Also, your sell strategy may be more important than your buy strategy.
We also cover the power of compound interest, and how a small investment at a young age can make a huge difference in your financial future.
To reach Lynn or find out more about the book she mentions in today's podcast, give her a call at (586) 773-6800. Or find her online at https://www.glwealthplanning.com/
For more info on the course or working with Paula, visit https://www.paulachristine.com/
Or send Paula an email: paula@paulachristine.com.
Lynn Habrowski is a certified financial planner with LPL Securities. Advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA SIPC
Paula: Welcome to Beyond the Paycheck. I'm Paula Christine. Living paycheck to paycheck and struggling to get ahead really sucks. But you can take control your money and live the life that you dream about with knowledge and commitment. I'll provide you with the knowledge. It's up to you to make the commitment.
So today I've asked a good friend of mine and a certified financial planner, Lynn Habrowski to come in and talk to us about all things related to the market and investing. So welcome Lynn.
Lynn: Well, thank you. Thank you for having me.
Paula: So we're gonna just jump right in with the big old question. What is the market?
Lynn: Well going back thousands of years, the market has always been a place where people go to exchange their goods. It's a place where people go to buy and sell and trade the things that they produce with the things that they need. So essentially, the stock market is the exact same thing. It's a place where people go to buy and sell bonds and all different types of securities.
Paula: That's a great way to explain that. Thank you. So we now know what the market is. So what is investing?
Lynn: Investing is an instance where a person takes their own money and commits it to a stock or a bond or a fund in hopes of making a profit over time. So people can invest in all different types of things.
They can invest in stocks, bonds, real estate commodities. The list literally goes on and on.
Paula: So most of our listeners, I assume know what a stock, bond, and mutual fund and investing are, but let's go into a deeper dive into what those are. Can you give us a little brief description?
Lynn: Sure. Stocks are basically shares of a company.
So when you purchase a share of a stock on the stock exchange, you actually become an owner of that company. Bonds on the other hand are basically an agreement in which you are lending a company your money, with a promise from that company that they'll pay you back interest over time. And then after a predetermined amount of time, you'll get your original investment back.
But basically in general, companies issue shares of stocks and bonds to get the money that they need to run and grow their businesses. So there's also mutual funds and ETFs. And for this discussion, let's just basically assume that those are the same thing, but this is an investment vehicle that allows investors to pool their money with other investors to purchase a broad range of stocks and bonds.
And there are literally thousands of mutual funds and ETFs out there that people can invest with varying themes. For example, on the equity side, there's large companies, midcap, small cap, foreign companies, there's even funds that will short the market for you. And then on the fixed side, there's government bonds, corporate bonds, MUNI bonds, and then you can even have a mix of stocks and bonds in ETFs and funds.
So there's really, really a broad variety of things to invest in.
Paula: That is quite a bit, how do I know what's right for me?
Lynn: So here's where it's an important for an investor to sit back and think about what they're trying to accomplish with their investments. Are they saving for their retirement or are they saving for their child's college education?
Maybe they have some cash that's just sitting there in the bank and they wanna make a higher rate of return. But they're gonna need that money a couple years to purchase a car. The question is, are they saving for retirement, which is basically investing, or are they in it for a quick profit, which I would call trading.
And those are two very, very different things. Personally, I invest my retirement money completely different than the money I allocate towards trading short term investing. So most people will tend to tell you that their goal is to make money. And that's where the amount of risk that they're willing to take is really important.
It's not just about the amount of money that they're willing to make, but they also have to take into consideration the amount of money that they could possibly lose.
Paula: So let me break that down for a minute. So in the short term, I've always thought that if you're looking to buy a car with short term money, then you would really try to keep that in cash.
What do you mean by the trading? If you jus have an account that you're just trading for fun, or how do you explain that?
Lynn: It's funny, especially the younger generation, they're just getting started. They really don't differentiate the difference between investing and trading. Investing is socking away that money in your 401k, you're putting that money in the. bank month after month, and saving for a longer dated purpose. Trading is hoping to make that maybe home run or big, you know, hit in the market. , I consider it a short term investment, but a lot of people think it's sort of the same thing. You'll see that with crypto investments and those kinds of things. That's trading, unless you're gonna go and buy Bitcoin or something and hold onto it for years, you're pretty much a trader.
So I really recommend that the younger people focus on the investing and skip the trading for now, if you're gonna insist on doing the trading, please do it with a small amount of money, something that really literally you can afford to lose.
Paula: Okay. So for the long term, we want to invest and if you want to have some, let's say some fun money and you went to go out and pick some stocks. Or buy some crypto. You wanna do that with a tiny bit of amount of money just to get started until you really know what you're doing.
Lynn: Yes, absolutely.
Paula: I was talking to someone the other day and they had purchased some stock that somebody had told them to purchase. You know, one of those, Hey, my coworker told me to buy this stock.
So I bought it and it went from, I think she said she paid like $5 a share. It went down to almost zero and it's coming back up and I think she's back to where she was at. And I go, well, what's your sales strategy? And she goes, what do you mean? And I'm like, well, how do you know when you're gonna sell it?
I mean, if you get too greedy, then again, it could fall back down to zero. So you have to have some sort of a strategy for when you're going to sell that stock and walk away.
Lynn: That's actually the more important side of the question. Everybody seems to know what they're gonna buy or when they're gonna buy it.
But the most important thing is to decide when you're going to sell it. The one thing I hear the most often is, well, I'll sell it when it gets back to X. Usually the dollar amount that they put in at least. That's not a strategy that works. Trust me, I've been investing for over 30 years. I did those same mistakes.
I'm trying to help people avoid those things. So you do have to have an exit strategy when you make a purchase, you don't wanna just be flying by the seat of your pants to make those decisions.
Paula: Yeah, I mean, it's great to have that sell strategy in place when you're buying individual stocks. So we just talked a little bit in that conversation about risk.
So for every investment, I know there's a risk, but there's also a reward. Can you explain what I mean by that?
Lynn: Yeah, absolutely. This is probably one of the most important questions when it comes to investing. So every investment out there has a risk and it has a reward. And it's taken me years to learn that. In general, the rate of return that you get is directly related to the risk that you're willing to take.
So what do I mean by that? So you can put your money in a savings account and just get interest with virtually no risk, but the interest might not be enough to grow your portfolio so that you ultimately have enough to retire. So this is an example of a low risk, low return investment. But you can also put your money into something again, like crypto and maybe make 10 times the amount of money in a year.
But on the flip side, you could also lose 90% of your money in that same year. So this is an example of a high risk investment with a potentially high rate of return. So the most common mistake that people make is not understanding the risk of the investment. Everyone is aggressive during a bull market, but can you handle the volatility during a bear market?
And we are there right now. 2021, last year, was a full blown bull market. Everybody was aggressive. And as of January 1st of this year, we are in a bear market. So I think people might be reevaluating their risk and their risk tolerances.
Paula: Yeah. Most people, the common question you get is, should I get out, should I stay in, what am I supposed to do?
Because the market is continuing to fall and,and I always say, Hey, if. If it wasn't meant to be in there for the long term, then it shouldn't have been in there in the first place.
Lynn: Unless you're trading, then that's a whole nother thing. So if people could break those two different things and they are completely different things in their mind, they will be successful.
Paula: I like that. I like that you explain the difference between trading and investing, because I don't think most people realize that there is a difference.
Lynn: I don't think they do either. I really don't.
Paula: So, is there a right or a wrong time? I know we just talked about it being a bull market. Now it's a bear market. So is there a right or wrong time to start investing there?
Lynn: I can say emphatically that there's never a wrong time to start investing. The earlier you start saving the more you can leverage the power of compound interest. I'm gonna go ahead and give your listeners an example here. So if you start saving $2,000 a year, from age 16 to 39, and you never save another dime after that. Your $48,000 will turn into 1 million by age 65, assuming you get an 8% rate of return. Now, if on the other hand, you wait it until age 40 to start saving, and now you have to save more. So let's say you're saving $10,000 a year and you save that from age 40 to age 65.
Your $250,000 will only grow into $800,000 assuming that same 8% rate of return. So there's your example of the power of compound interest over a long period of time. It's very, very powerful.
Paula: Okay. So one of the reasons I started this podcast and launching the Making Money Matter course is that I wish I would've known what you just talked about when I was in my twenties about compounding.
I didn't know it. And I wish I did because I would be in such a far better position than I am now. And I see young kids today and I'm like, do whatever you can, even if it's putting $10 a week in a 401k, but just start because it just grows over time. And , when you watch that balance grow, it's so rewarding, but most people just don't understand the compounding and they think, well, the jet skis more important than saving for retirement, or saving for anything. But, you know, it's one thing I wish I could pound into their heads, but we'll try, right?
Lynn: Yes. Well, that's kinda why I added that example, cuz it really is. I. I did my college paper on compound interest. And I was shocked when I did it. I was like, holy cow, the impact of compounding. So that made me a very early saver. It really did changed my life.
Paula: I wish I would've been you and following you around in college. So Lynn, this has been a lot of great information that you've shared with us today. And just even what some of the basic investing terms are, and then the importance of compounding and risk.
Are there any special books or websites our listeners should check?
Lynn: That's a great question. You know, there's all kinds of information out there about investing. Unfortunately, I like to emphasize this. There's a lot of sites out there that have bad advice or misleading information, and people think it's real, cuz it's on the internet.
So people are gonna go search on the internet for any questions they have. It's just what we do. But as a general rule, you wanna avoid sites that are trying to sell you something or tell you to subscribe or invest in their product. If you see that, just move on, but to understand investing, you need to know the basics of money and economics.
And one of my absolute favorite books is an Uncle Eric series and the book is called Whatever Happened to Penny Candy. And literally in this one, very simple, easy read book. You can replace an entire shelf of economic books. So have your listeners give me a call and I will be happy to send them a copy of the book. It would be my pleasure.
Paula: Okay. That's great, Lynn. Thank you. So how do they give you a call?
Lynn: My office phone number is (586) 773-6800. Just give us a call. And I will send that out. And also I'm happy to answer any just questions that they might have about investing or the markets. That's what we're here for.
Paula: Thank you very much, Lynn. So I do have a disclosure that I do need to read for Lynn. So Lynn Habrowski is a certified financial planner with LPL Securities. And advisory services are offered through LPL Financial, registered investment advisor member FINRA SIPC. Did I get that right, Lynn?
Lynn: I think you did. Yes. Perfect.
Paula: Thank you so much for being with us today.
Lynn: Yeah. Thank you for having me. This has been a lot of fun.
Paula: If anybody wants to reach out my email is Paula@PaulaChristine.com or check out my website paulachristine.com. Thank you.