2016 MoneyCoach LLC Investing Video Transcripts With ... - Bitly

© 2016 MoneyCoach LLC

Investing Video Transcripts With Citations

Why Invest (Video 1) Meet Bob. Bob just graduated from college and got his first job at Corporate Co. After a month of hard work, Bob has just received his first paycheck. He’s very excited. Bob plans to spend 50% of that on rent and utilities, and another 30% of it on food and fun activities, like going to the movies. As for the last 20%, Bob wants to do something with it, maybe even invest it, but isn’t sure where to start. So, Bob decides to deposit it into a bank account. Bob thinks this is a safe plan. After all, the bank will actually pay him a small amount of money each year, called interest, just for keeping his money at the bank1. This sounds great, there’s just one problem. Bob may actually be losing money. Bob is flabbergasted. How can that be? Well, it comes down to something called inflation2. Inflation is simply the idea that prices for goods and services rise over time. Why inflation occurs is beyond the scope of this video, but your grandparents are cranky for a reason: in the 1950’s you could actually buy a loaf of bread for 12 cents and a new house for $10,0003.

1

Interest Overview: https://en.wikipedia.org/wiki/Interest 2 Inflation Overview: https://en.wikipedia.org/wiki/Inflation 3 Inflation Prices in the 1950's: http://www.thepeoplehistory.com/50sfood.html http://www.thepeoplehistory.com/1950s.html

Inflation in the U.S. is targeted to around 2% a year4. This is bad for Bob. That’s because even though the bank may pay Bob 1% for his deposit, prices have actually increased by 2%. So what should Bob do? Well, in order to actually make money, Bob needs to invest in something that will beat inflation. Generally speaking, only three things do: Bonds5, Commercial Real Estate67, and Stocks8. Let’s start with bonds. Bonds are loans made to corporations or governments9. In return for your money, called principal, you’ll receive a fixed amount of interest per year, plus your money back once the bond expires. Because of this guarantee, bonds are the safest of the three investments, though this safety

4

U.S. Inflation Target: http://www.bloombergview.com/articles/2015-09-18/the-fed-should-raise-itsinflation-target http://www.economist.com/blogs/economist-explains/2015/09/economistexplains-7 https://en.wikipedia.org/wiki/Inflation_targeting Historical Inflation Numbers: http://inflationdata.com/Inflation/Inflation_Rate/Long_Term_Inflation.asp 5 Overview of Stock and Bond Performance: https://www.securian.com/public/Securian/Documents/Retirement%20GPS/F699 39.pdf 6 Note here we do not include commodities (like gold) in the list of inflation beating assets. Here's why: https://www.betterment.com/resources/investment-strategy/the-case-againstinvesting-in-commodities/ 7 Overview of REIT Performance: https://advisor.fidelity.com/app/proxy/content?literatureURL=/9858228.PDF 8 Overview of Stock and Bond Performance: https://www.securian.com/public/Securian/Documents/Retirement%20GPS/F699 39.pdf 9 Bond Overview: https://en.wikipedia.org/wiki/Bond_(finance)

comes with a cost: they have the lowest potential investment return in the longrun10. Next we have commercial real estate. This is property purchased to make money, generally by renting it out11. While this is quite difficult for the average investor to do on his own, Bob could instead easily invest in a REIT12, which is a professionally managed real estate portfolio. Finally, we have stocks13. Stocks are simple: they represent a piece of ownership in a company, like Apple or Google. People buy and sell little pieces of these companies, called shares, in places called stock exchanges. When Bob buys a share of say, Apple, he becomes a partial owner. When Apple does well, the share price goes up and Bob makes money. When Apple does poorly, the share price goes down and Bob loses money. These fluctuations can make stocks risky. However, fortunately for Bob, stocks in the United States return on average about 9% a year14, including both share price appreciation and dividends15, which are cash payments made to each shareholder when the company does well. Thus, if Bob invests the remaining 20% of his paycheck, say $100, he can beat inflation by almost 7% each year16! 10

Bond Overview: https://en.wikipedia.org/wiki/Bond_(finance) Overview of Stock and Bond Performance: https://www.securian.com/public/Securian/Documents/Retirement%20GPS/F699 39.pdf 11 Commercial Property Overview: https://en.wikipedia.org/wiki/Commercial_property 12 REIT Overview: https://en.wikipedia.org/wiki/Real_estate_investment_trust 13 Stocks Overview: https://en.wikipedia.org/wiki/Stock 14 Average U.S Stock Market Return (Specifically the S&P 500 Index): http://www.moneychimp.com/features/market_cagr.htm 15 Dividend Overview: https://en.wikipedia.org/wiki/Dividend 16 7% Number Overview:

But that’s not all! Here comes the real magic. The next year, Bob will not only earn another 9% on his initial $100 investment, called principal, but also an additional 9% on the $9 dollars in profit from the previous year. Earning money on both your principal and profit is called compounding17, and its magic is undeniable. Start investing early enough, and your portfolio will be like a snowball rolling down a hill, outstripping even those who put in much more18, but start later. Hopefully you and Bow now understand why it’s important to invest your money. Be sure to watch our next video, which teaches you how to actually invest, and be sure to check out our website, where you find can more educational material and great investment solutions.

http://money.usnews.com/money/personal-finance/mutualfunds/articles/2012/08/08/is-the-7-percent-return-for-stocks-extinct http://www.moneychimp.com/features/market_cagr.htm 17 Compounding Overview: https://en.wikipedia.org/wiki/Compound_interest 18 The Power of Compound Interest: http://www.businessinsider.com/amazing-power-of-compound-interest-2014-7

How to Invest (Video 2) Meet Bob. Bob just got his first paycheck from his first job out of college. He’s very excited. Bob has decided to invest some of that money, after watching our video “Why Invest”, but doesn’t know where to start. What should he do? Well, when choosing what to put into any investment account, whether it's a specialized retirement account, like an IRA, or just your run-of-the-mill account, Bob has three major ways to “fill it”. Option One: He could do it himself, and use an online broker to buy individual stocks, bonds, and funds. Option Two: Bob could give the money to professional investors. Some, like private equity and hedge funds, are only available to high net-worth investors19. Others, like mutual funds, are available to everyone20. In either case, they both employ very smart people who have been trained to purchase a lot of shares in a few companies, like Apple or Google, that they believe are going to do better than the overall stock market. This brings us to option three. Bob could give his money to robo-advisors21. Unlike the professional investors we just described, robo-advisors believe it’s 19

Hedge Fund Overview: https://en.wikipedia.org/wiki/Hedge_fund Private Equity Fund: https://en.wikipedia.org/wiki/Private_equity 20 Mutual Fund Overview: https://en.wikipedia.org/wiki/Mutual_fund 21 Robo-Advisor Overview: https://en.wikipedia.org/wiki/Robo-advisor Good example of a robo-advisor and their investment methodology: https://www.betterment.com/portfolio/

impossible to beat the stock market in the long-run. That’s why instead they choose to just match it, buying a bunch of exchange traded funds, or ETFs, which are each made up of small pieces of thousands of different stocks or bonds22. This enormous diversity allows them to track the market and keeps them from putting too many of your eggs into any one basket, which dramatically lower your investment risk through diversification23. In addition, using your age and risk tolerance, robo-advisors can also personalize a portfolio to your situation. That means as you age and need more security, your portfolio will automatically shift from high-risk, high return investments, like stocks, to low risk, low return investments, like bonds24.

22

ETF Overview: https://en.wikipedia.org/wiki/Exchange-traded_fund 23 Diversification Overview: Think of diversification this way. You buy the stock of Company A, which, like all stocks, has an average return of around 9%. While, there is a chance Company A goes gangbusters, earning you 20% this year, there is also the chance Company A goes bankrupt, or otherwise underperforms, giving you a sub-9% return. Now imagine you buy 25 more stocks, Company B - Z. They all have the same average return of Company A, 9%. However, (assuming the stocks are uncorrelated), the odds of them all going gangbusters and/or bankrupt at once are way smaller, lowering your risk, and increasing the odds that you'll actually get that average return, 9%. The benefits of diversification are summarized beautifully (and mathematically) by Modern Portfolio Theory (MPT). However, the “meat” of the theory (and its potential flaws) are too complicated to go over here. In short, just diversify your portfolio. You'll thank us later! MPT Theory: https://en.wikipedia.org/wiki/Modern_portfolio_theory Diversification: https://en.wikipedia.org/wiki/Diversification_(finance) 24 An example of this process: https://www.betterment.com/resources/research/stock-allocation-advice/

So robo-advisors seem pretty cool right? But are they really better than mutual funds25? Well, as it turns out, yes. Robo-advisors cost less26 without sacrificing performance, and the data agrees: less than 1% of all mutual fund managers can consistently beat the market27 after fees in the long-run. And these are the professionals! Amateur do-it-yourself investors are even less likely to succeed. 25

The Third Option: Target Date Retirement Funds:

These can be thought of as "old-school" robo-advisors and are slightly cheaper under certain circumstances. However, they likely will suffer from slightly worse performance due to poorer asset allocation and rebalancing, plus they don't have tax-loss harvesting. Even if those benefits aren't true, target date retirement funds also lack the flexibility (i.e. sliders that allow you to easily move from stocks to bonds), personalization (i.e. things are less customized to your risk preferences and specific situation), and modern easy to use design that roboadvisors provide. Plus their account minimums are much, as robo-advisors require $0-500 while Vanguard requires $1000. Good Pro Target Date Fund Article: https://medium.com/@raaid/roboadvisorsare-good-investment-vehicles-55d9ba23ce11#.g1wsx1ke5 Good Anti Target Date Fund Article: https://pages.wealthfront.com/faqs/howdoes-the-wealthfront-service-compare-to-a-target-date-fund/ 26 The average mutual fund expense ratio was 0.70%, which is about 0.33% less than Wealthfront, a notable robo-advisor. http://www.icifactbook.org/fb_ch5.html https://pages.wealthfront.com/faq/ 27 The Actual Papers: http://poseidon01.ssrn.com/delivery.php?ID=76910006711107202300508302600 4082101005063061035027036094120121100090090095070001078024006023 0470200400340960661021080940030980080860080540411081260680801170 0608406408006007301910500308900510101500701706411508002302809603 0000070104002011090091109106&EXT=pdf http://fletcher.tufts.edu/~/media/Fletcher/Microsites/swfi/pdfs/CARFletcherPaper_ Unlocked.pdf Great Summary Articles: http://www.institutionalinvestor.com/Article/3256074/Beating-the-Market-HasBecome-Nearly-Impossible.html#.VmCNR8rZH88 http://www.marketwatch.com/story/almost-no-one-can-beat-the-market-2013-1025

So, for those ready to take the plunge, an account with a robo-advisor is easy to set up, has reasonable account minimums, and most importantly, no investing knowledge is required to use one. Finally, although we know Bob is very excited to start investing, we recommend he follow these three simple guidelines before getting started. ● One: Don’t invest any money you’ll need in the next five years28. ● Two: Don’t start investing until you’ve established your financial foundation. This means being free of high-interest debt, being adequately insured, and having at least six months of living expenses saved up. ● Three: Once you’re ready, automatically invest a fixed percentage of your paycheck per month, and then forget about. This ensures you invest consistently and remove emotion from the equation, no matter what the market is doing29. For more details on these guidelines and setting up your financial foundation, be sure to check out our video “Funding Your Future”. Hopefully you and Bob now better understand how to actually invest. Be sure to watch our next video, which covers the confusing world of 401(k)s and IRAs, 28

Investing Timelines: http://twocents.lifehacker.com/the-best-place-to-park-your-money-based-on-yoursaving-1543781226 http://www.businessinsider.com/investing-basics-young-people-5-2014-9 29 That way, you'll remove emotion from the equation, buying more stocks when people drive them too far down, and fewer stocks when people drive them too far up. This method of investing is called Dollar Cost Averaging (DCA), as opposed to the Lump Sum method of investing. There is mathematical to evidence to suggest DCA slightly less returns than Lump Sump. However, DCA is how most people actually invest (a little bit at a time) and does lower risk relative to Lump Sum investing, as it prevents you from putting all your money in just as the market might be about to crash. http://business.time.com/2012/11/15/is-dollar-cost-averaging-dumb/

and be sure to check out our website, where you can find more educational material and great robo-advisors.

401(k) and IRA 101 (Video 3) Meet Bob. Bob is a newly employed college graduate with the urge to invest. Bob just finished our two videos “Why Invest” and “How to Invest,” so he understands how he can easily and effectively invest his money through a roboadvisor. While Bob is proud of this newfound knowledge, one obstacle remains in his path: alphabet soup. Everyday, Bob is confronted by a terrifying array of terms: 401(k), IRA, the list goes on and on. Luckily for Bob, we have him covered. Let’s start with most basic: 401(k)s30 and 403(b)s31. These are tax-advantaged investment accounts, designed for retirement, and offered by either a for-profit employer, in the case of a 401(k), or a nonprofit or government employer, in the case of 403(b32). In either case, both accounts are virtually identical, and come in two forms, Traditional and Roth.

30

Overview: http://www.finra.org/investors/401k-basics Traditional 401K: https://en.wikipedia.org/wiki/401(k) Roth 401K: https://en.wikipedia.org/wiki/Roth_401(k) 31 403(b) Overview: https://www.irs.gov/publications/p571/ch01.html https://en.wikipedia.org/wiki/403(b) https://www.irs.gov/Retirement-Plans/Are-You-an-Ineligible-403(b)-PlanSponsor%3F 32 403(b) Overview: https://www.irs.gov/publications/p571/ch01.html https://en.wikipedia.org/wiki/403(b) https://www.irs.gov/Retirement-Plans/Are-You-an-Ineligible-403(b)-PlanSponsor%3F

So what’s the difference33? Well, with a Traditional 401(k), the money you put in is pre-tax, and then only taxed when withdrawn at retirement, while with a Roth 401(k) it’s the opposite. So which one should you choose34? Well, as the math turns out, Roth 401(k)s are perfect for most people, especially for those in a low to moderate tax bracket, like 25% or below. In contrast, traditional 401(k)s are generally better for those in a higher bracket. In either case, your employer may match your contributions up to a certain amount35, like 5% of your total salary36. Sounds pretty great right? After all, free money and tax-advantaged growth, what’s not to love? Well, a few things. ● One: As of 2016, your contributions are limited to up $18,000 per year37. 33

Overview: http://www.finra.org/investors/401k-basics Traditional 401K: https://en.wikipedia.org/wiki/401(k) Roth 401K: https://en.wikipedia.org/wiki/Roth_401(k) 34 Roth 401K vs. Traditional 401K: http://www.forbes.com/sites/fidelity/2015/04/22/roth-or-traditional-ira-or-401k-twotips-for-choosing/#7e4d1db03ccc http://www.cnbc.com/2014/04/25/roth-v-traditional-cramers-rule-of-thumb.html 35 Overview: http://www.finra.org/investors/401k-basics Traditional 401K: https://en.wikipedia.org/wiki/401(k) Roth 401K: https://en.wikipedia.org/wiki/Roth_401(k) 36 01K Matching Overview: https://en.wikipedia.org/wiki/Employer_Matching_Program

● Two: Not only will your employer restrict you to a specified list of funds 38, you’ll also have to pick them yourself, which can be a real challenge. However, you can avoid this, either by using our recommended roboadvisor to manage your 401(k), or by manually selecting what’s called a life-cycle or target-date fund, which operates much like the robo-advisors we described in our previous video, just with less flexibility and personalization39. ● Three (and here’s the real kicker): you generally can’t cash out of your current 401(k) unless you meet a hardship exemption, like excessive medical expenses40. Plus, even if you do meet them, you’ll still generally have to pay a 10% penalty, plus taxes, on money withdrawn before age 59 and a half41. So that’s 401(k)s. Let’s move onto the next account, IRAs42. 37

016 401K Contribution Limit: https://www.irs.gov/uac/Newsroom/IRS-Announces-2016-Pension-PlanLimitations%3B-401(k)-Contribution-Limit-Remains-Unchanged-at-$18,000-for2016 38 Overview: http://www.finra.org/investors/401k-basics Traditional 401K: https://en.wikipedia.org/wiki/401(k) Roth 401K: https://en.wikipedia.org/wiki/Roth_401(k) 39

Life Cycle Fund Overview: http://www.nbcnews.com/id/13738703/ns/business-personal_finance/t/are-lifecycle-fund-investors-doing-it-wrong/ https://en.wikipedia.org/wiki/Target_date_fund 40

401K Withdrawals: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/401kResource-Guide-Plan-Participants-General-Distribution-Rules https://www.irs.gov/Retirement-Plans/Do%E2%80%99s-and-Don%E2%80%99tsof-Hardship-Distributions https://www.irs.gov/pub/irs-tege/forum13_loans_hardship_distns.pdf 41 401K Withdrawals: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/401kResource-Guide-Plan-Participants-General-Distribution-Rules 42 IRA Overview: https://en.wikipedia.org/wiki/Individual_retirement_account

IRAs come in the same two forms as 401(k)s, Traditional and Roth, and for the most part, they have the same tax advantages, withdrawal rules43 and selection criteria: Roth favors those in low to moderate tax brackets, like 25% or below, while Traditional favors those in higher ones44. However, there’s a few differences between IRAs and 401(k)s to be aware of. ● One: Your contributions to an IRA are more limited, currently only $5,500 per year across both Traditional and Roth accounts45. ● Two: You’re barred from contributing to a Roth IRA at certain high income thresholds46. ● Three: If you’re a small-business owner or freelancer, you can also open a SEP IRA, which operates like a traditional IRA, just with a much higher contribution limit47. ● Four: Unlike a 401(k), almost every brokerage firm, including roboadvisors, will allow you to open an IRA and select whatever fund you

43

Roth IRA Withdrawal Rules: https://www.irs.gov/publications/p590b/ch02.html Traditional IRA Withdrawal Rules: https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAsDistributions-(Withdrawals) 44 Overview on Choosing Between a Roth and Traditional IRA: http://www.cnbc.com/2014/04/25/roth-v-traditional-cramers-rule-of-thumb.html 45 RA Contribution Limits: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/RetirementTopics-IRA-Contribution-Limits 46 Roth IRA Contribution Limits: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-ofRoth-IRA-Contributions-That-You-Can-Make-for-2016 Technically you can get around these income limits with a backdoor Roth Conversion, a complicated piece of financial wizardry. Here's an overview: https://www.betterment.com/resources/retirement/401ks-and-iras/roth-ira-rulessmart-ways-to-avoid-taxes-on-a-conversion/ 47 EP IRA Overview: https://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-SEP https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/SEPContribution-Limits-including-grandfathered-SARSEPs

want48. This is incredibly useful, especially if your 401(k) has costly or undesirable options. Plus, withdrawing money is also easier in an IRA, as you don’t need a hardship exemption49, though, if you’re below age 59 and half, you’ll still have to pay the 10% fee and taxes50. So that’s IRAs. So how do you choose between them and a 401(k)? Well, we have simple rule of thumb. First contribute to your 401(k) until you’ve hit maximum matching, then max out your IRA, and then finally, return to max out your 401(k)51. Of course, for most people this is unrealistic, especially considering we only recommend you invest 10-15% of your paycheck for retirement52. However, for educational purposes, let’s say you’ve maxed out both. What do you do then? Well, you can then put the remainder of your investing money into a taxable investment account offered by any brokerage firm, including robo-advisors. While these accounts lack tax advantages, they also have zero limitations on contribution size and withdrawals, making them a great home for the rest of your money.

48

Companies You Can Open an IRA With: https://www.irs.gov/Retirement-Plans/Individuals-Retirement-Arrangements--Getting-Started 49 IRA Early Withdrawals: https://www.irs.gov/pub/irs-tege/forum13_loans_hardship_distns.pdf 50 Roth IRA Withdrawal Rules: https://www.irs.gov/publications/p590b/ch02.html Traditional IRA Withdrawal Rules: https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAsDistributions-(Withdrawals) 51 Choosing between a 401K and IRA: http://www.cnbc.com/2014/06/23/401k-or-ira-cramers-rule-of-thumb.html 52 How Much to Save for Retirement: http://money.cnn.com/retirement/guide/basics_basics.moneymag/index7.htm

Finally, a bit of house-keeping. Whenever you change jobs, you start a new 401(k) with your new employer and leave the old one behind. Whatever you do, don’t cash out of the old one. Instead, roll it over into a matching Traditional or Roth IRA53. This will allow you to consolidate your funds and lower your fees, while avoiding any tax or withdraw penalties. And don’t worry, robo-advisors make this process a breeze. Congratulations! You have finished the investment basics curriculum! If you want to see great robo-advisors or stockbrokers, or just more educational content, be sure to check out our website.

53

01K Rollover Overview: http://www.finra.org/investors/401k-rollovers