How do I invest?

0:00- [Instructor] So let's talk a little bit about saving for retirement. So we've touched on things like 401k plans and IRA plans in other videos, but here we'll think about how you should think about how much you should put in or where you might want to invest those funds once they're in these plans.

0:18So first of all, how much should you put in? And you're oftentimes, when you're asked to put into a retirement plan, asked for a percentage, or asks for an actual dollar amount, most financial planners will tell you to target 15% of your pre-tax income into your 401k or your IRA.

0:37Now, if you do very well and you have a very large pre-tax income, you could eventually hit up some actual dollar amount spending limits, but in general, if you can try to get to the 15%, obviously the more you do, the better you're going to be off, the better you're going to be for retirement.

0:55Now, let's say that you're able to do this and you are able to put it in say, a 401k plan, and hopefully maybe your employer is matching too, so that's even another reason to try to at least max out the match. But where do you invest it? And there's a lot of different places you could invest it.

1:11You could potentially pick your own stocks, you could put it in bonds, you could do things like exchange traded funds. You could do things like mutual funds. And financial theory, and I won't go into a lot of detail here, although I think there's other videos I made many, many years ago on Khan Academy about this, is that especially in the long run, there's a lot of benefits to diversification.

1:36I'm gonna write this in another color 'cause it's very important, diversification. Now, why does diversification matter? Well, you might say, okay, I'm a big believer in some fancy company, Company A. But Company A, it might be pretty risky. The stock might do something like this, and there's always some chance that something happens and a company just goes outta business or some competitor is able to really beat it.

2:04And so you're really exposing your retirement funds if you only have a handful of stocks there to this type of volatility, this type of ups and downs. So generally speaking, the more that you can diversify, have a basket of investments of stocks and bonds, it tends to flatten out the ups and downs a bit, you'll still have some volatility, but it tends to flatten it out.

2:30And there's a whole division or a whole realm of finance and portfolio theory that says you actually probably get the best risk reward trade off the more that you diversify. So another question is, how should you diversify? Well, you could try to handpick it yourself and try to manage it yourself, but that could be very hard.

2:49You're not up on the news. It's a lot to buy and sell a bunch of different stocks and keep up with it. And that's where things like exchange traded funds and mutual funds can be really useful because these are just baskets of many, many, many stocks. Many times hundreds of stocks, which would be a very, a huge pain for you to be buying and selling yourselves.

3:08And especially things like ETFs. Can, mutual funds, well, if you're doing it within a retirement fund, you tend to not have to worry about the tax implications as much. But generally speaking, ETFs can also have some tax benefits to them as well. Now the question is what type of mutual fund or ETF should you invest in?

3:27And when you look at their titles, you're going to see words like growth and equity, and aggressive. Or on the other hand, you might see words like income or conservative, or balanced. And generally speaking, if you see words like we see in orange here, these tend to be riskier, riskier mutual funds or ETFs.

4:03Now you might say, well, why would I wanna take on more risk? Well, in theory, the higher risk might have higher reward. Now this isn't always guaranteed, but that's the theory that if you're going after growth stocks, equities is just talking about stocks, aggressive, so that might be faster growing things, but they also might be more volatile.

4:21This also tends to lean more into stocks. So it's going to lean more into stocks. And on this purple side, when we're talking about income, conservative, balanced, this might be more conservative stocks, maybe not growing as fast, but maybe they're providing dividends.

4:38It can also be things like bonds. And so it's going to be hopefully less volatile and maybe your expected return might be lower, but that's not always the case. Now, generally speaking, financial planners will tell you when you're young and retirement is many decades away, you can afford to be a little bit more weighted on the, or even a lot more weighted on the equity side, on the growth side, because even if there's some ups and downs, those you're not retiring for another 20 or 30 years, but the closer you get to retirement, you can't afford one of these big drops in your portfolio.

5:10So maybe you should weight your portfolio more and more to things like bonds or more conservative dividend paying stocks. And there's actually funds out there that help you balance this. So for example, let's say that you saw the global growth fund, let's call, there's some mutual fund called Global Growth 2045.

5:33This type of fund, when it's named like this, tends to imply that this is for someone who's going to retire in 2045. So closer to now if we're decades away from 2045, it might be investing a little bit more on the growth side than on the income conservative side.

5:49But the closer you get to 2045, it's going to balance towards this more conservative side. Financial planners would also do the same thing for you, but here it's already happening within the mutual fund. So the most important part here is 2045. If you think you're gonna retire 2045, this is going to be a really, this could be an interesting thing for you to look at.