🌱 Helllloooo and welcome to Sprouts Finance! Where we don’t pick our nose and eat it. Who said finance couldn’t be fun? 👏
Estimated read time: 4 minutes and 26 seconds
Today’s edition is written by Bean Sprout. The last two weeks have been pretty conceptual so I thought I’d mix it up like a 4-bean salad. We’ll go through different investment objectives and what I considered when building my strategy so buckle up friends.
We’ve also thrown together a few questions at the bottom if you want to test your knowledge as well as a little button so you can rate and share the email.
👸Fact of the day: What do the Queen, war and cars have in common?
🧑🏫 Understanding objectives: What objectives could an investment have?
🫘🌱Bean Sprout breakdown: What I considered when building my strategy
Key takeaways:
💡 Investing can have multiple goals, including to generate income and/or capital growth
💡 Frameworks outlining objective, time horizon and risk tolerance can help build an investing strategy and mitigate risk
FACT CHECK
🤯Fact of the day
During WWII, Queen Elizabeth II served in the military as a mechanic.
🎬Recap
Let’s quickly recap what we covered last week before going in:
👉Higher potential returns often means higher risk
👉Risk tolerance is how much volatility/what’s the worst case scenario you are willing to accept
👉Longer time horizon typically means greater risk tolerance
You can find a deeper explanation in last week's email.
UNDERSTANDING OBJECTIVES
Investing can have different objectives, but what does that actually mean? Simply put, it’s important to know what you actually want from the investment otherwise things might not work out so well. A bit like a relationship! Except a relationship probably (hopefully?) has more tears. 🥲
Typically investors have one of either two objectives. Do they want income or do they want capital growth?
What do we mean by this? Well with an income strategy, an investor is typically looking for a steady flow of income, like rent on a property, a coupon on a bond or a dividend (don’t worry if you don’t know what bonds/dividends are yet - stick with us and we’ll explain in the coming weeks).
👵Income is often thought of as a percentage “yield” - e.g. what do I annually receive in rent divided by the purchase price of the property. Income based strategies are typically less risky and more common with older people/retirees (sorry Grandma), who have a lower time horizon and therefore lower risk tolerance. Sound familiar?
That being said, some investors (Grandma included) might chase a higher yield if they’re feelin’ risque - but higher yield is a higher return, which means…..🕵️♂️
Can you say RISK? That’s right!
Thanks Dora.
Alright so what’s capital growth other than a fancy sounding word? Capital growth involves buying and selling an asset, and you only make money if the asset has gone up in value (you’ll make the price you sold the asset for minus the price you bought it for). A common example would be stocks. People often buy stocks with the expectation that the stock price will increase in the future. 📈
“It could all be so simple” - Lauryn Hill probably singing about buying and selling stocks.
🧐However the profit isn’t guaranteed, so it’s typically riskier than an income strategy. Lauryn was right! Although it can have higher returns on average. That’s why buying and holding stocks is a more common strategy for investors with a longer time horizon.
You guessed it, higher risk tolerance.
BEAN SPROUT BREAKDOWN: STRATEGY BUILDING
Building a strategy takes time and requires important considerations. Following it is even trickier and requires discipline 🫡. Like eating your vegetables.
Well too bad!
One major consideration when building my strategy was understanding my objective: what do I actually want from my investments?
Another consideration was knowing how much I actually had to invest. I sat down and calculated (in a spreadsheet, 🤢, I know):
🔑 Rent/Utilities $
🔑 Food $
🔑 The fun fund ($ spent going out)
🔑 Other bills like gym/Netflix/phone
⛔️I then deducted all of those from my monthly salary and had the option to invest, save or spend the remainder.
Now that I knew how much I could invest it was time to figure out how to build my strategy. Here is what I considered:
🔑 What are my financial goals (income, long term capital growth)?
🔑 What is my investment time horizon?
🔑 If my investments lost 30% of value in 1 month would I cry?
🔑 How much fluctuation/risk am I comfortable with?
🔑 Does that make me aggressive or conservative?
🔑 How frequently do I want to manage my investments (weekly, monthly, yearly)?
🔑 Based on the above, what assets do I want to invest in?
🔑 How will I allocate these?
My answers to these questions then informed what products I bought and in what proportions. Don’t stress if you aren’t sure what half of the questions above mean, we’ll cover them in later emails. It’s why Sprouts is here - to help you get better at managing your own money.🤓
It’s time to get out the Boyz II Men, we’re almost at the end of the road for this week 🥹. Next week we’ll be demystifying stocks so stay tuned! 🎉
Q&A
We’ve also got some questions/answers below for you to test your knowledge.
🙋♀️ Fill in the blank
❓Investing can have goals to ____
Generate income
Increase in value (capital growth)
Both
❓Income strategies are typically ____ risky as you are guaranteed some return
More
Less
❓Yield can be calculated by dividing income by ____
Time horizon
Beans
Price
👇 Answers
Both. less, price
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DISCLAIMER:
None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.