Fundamental Investment Concepts

Fundamental Investment Concepts

Monday, October 2, 2017

A lot of people and readers are new investors. We  would like to offer some fundamental investment concept basics from various books and articles that we have read to save you some time.

It is up to you to continue your own personal development, do your own intelligent research, refine your knowledge and learn the skills to be successful in the business world. No one is born with the innate knowledge that we have as adults. But we are all equal in that we have the unparalleled ability to learn new skills that determines our success in life.

Below are some basic terms and concepts to get you started.

Stocks – research these on CNNmoney, Kiplinger’s, Morningstar, Google and Yahoo Finance, and

Bonds – Use these to offset some of the losses of stocks and inflation.

Mutual funds = a pool or collection of various stocks that spread risk over many instead one single stock performance, check out Vanguard

Mutual funds can be actively managed or passively managed such as index funds. Actively managed funds may have a lot of “churning” that reduces overall profitability due to fees that are incurred in buying and selling

Index funds = tracks common benchmarks like Dow Jones or S&P 500

The following three terms are used often with (mutual) funds.


No-Load – often means no commission or sales charge

No transaction fees

ETF’s – these can be cheaper than mutual funds but the costs are slightly different. Also consider the tax consequences. Consider larger funds that are closer to index funds than actively managed funds

REIT’s – real estate investment trusts – a way to get exposure in the real estate market


Additional terms

Taxable vs nontaxable – Know what will trigger taxable events (usually a sale or withdrawal from an account especially from IRA’s or retirement plans)

Taxable events can cause 1099-B tax forms you have to put on Schedule D.

Dividends are occasional distributions of profit or earnings to the stock investor often quarterly or even monthly. Dividends are good because you can often calculate your tax at the lower qualified dividend or capital gains rates.

IRA’s are set up usually through a broker/financial institution/bank.

Traditional IRA – Tax deferred meaning you pay tax when you take out the money but not upfront

Roth IRA – Pay tax up front and tax free after certain conditions

401k – Tax Deferred. Through a job. Higher Contribution limit than IRA’s


More tips and tricks

Using a spreadsheet

Use this to track your performance and account balances periodically

Age base allocation – This is just one way to allocate stock. There are other ways as well. The theory is that the older you get the less you are invested in stocks and less risk. But this type of allocation is not logical per The Intelligent Investor by Benjamin Graham who advocates 50-50 in stocks and bonds. Age based allocation uses the formula of “100 minus age”. In his book he says age shouldn’t be the only determining factor in allocating stocks if you have a different sense of risk.

Diversify – Don’t put all your money in one particular asset class. Put some in stocks, bonds, cash, CD’s, etc. It’s okay to keep some funds in cash in reserve in case you want to buy a whole lot of something else later such as real estate or more stock.

Dividend Reinvestment or DRIP (dividend reinvestment plans) – Good idea to do this to compound the money

Rebalancing – About once a year – The idea that your portfolio allocation will change. Let’s say your stocks end up 60% of your portfolio and bonds 40% but your original portfolio had a different allocation between the two. So you rebalance it so it’s back to original ratio.

Dollar cost averaging – Buying consistently on a set time frame regardless of price so that on average you buy stocks at a good price. You would buy when it goes down and buy also when it goes up so that you’re in the market and on average you buy at a good price.

Rule of 72 – This rule says you will double your investments roughly every 6 years. It says take 72 and divide it by your rate of return. Let’s say you assume a 12% rate of return based on stock averages from historical S&P 500 would mean 72/12 = 6 years. If you expect an 8% return then 72/8 you would double your money in about 9 years.

Fundamental ideas:

  • Stocks will go down and up with market and economic cycles
  • Historically markets will correct
  • Don’t lose money because you might not recover
  • Don’t invest more than you can afford to lose
  • Don’t put more in your retirement than you can afford to not have access to for many years
  • Know the tax consequences of your stocks and whether what kind of stock or fund to hold best in what kind of account.
  • Past performance is not an indicator of future results.
  • Buy stocks when they are inexpensive, hold for the long run and sell when the fundamentals don’t make sense any more.
  • Invest don’t speculate.
  • Put your money in different pots. The spending fun money should be separate from the saving conservative money.

Do you love investing? What are some great investing tips that you would give your younger self?

Author: savvywealthmedia

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