Module 7: Investing Fundamentals

Inflation is Stealing Your Money

Reality: Cash loses purchasing power every year due to inflation

Example: $10,000 in 2014 → $7,500 purchasing power in 2024 (3% avg inflation)

Saving alone isn't enough. You need your money to grow faster than inflation.

The Power of Compound Interest

Einstein allegedly said: "Compound interest is the 8th wonder of the world"

How it works: You earn returns on your principal PLUS returns on your previous returns

Example:

• Year 1: $1,000 @ 10% = $1,100
• Year 2: $1,100 @ 10% = $1,210 (you earned $110, not $100)
• Year 30: $17,449 (growth accelerates over time)

Index Funds (Recommended for Most People)

What: A fund that tracks a market index (like S&P 500)

Why: Low fees (0.03-0.20%), automatic diversification, consistent returns

Example: VTI (Total Stock Market), VOO (S&P 500)

Historical performance: S&P 500 averaged 10% annually over 50+ years

401(k) / IRA (Tax-Advantaged Accounts)

401(k): Employer-sponsored. Contributions reduce taxable income. Many offer employer match (free money)

Traditional IRA: Tax deduction now, pay taxes in retirement

Roth IRA: No tax deduction now, tax-free growth and withdrawals in retirement

Max contributions (2024): $23,000 (401k), $7,000 (IRA)

Individual Stocks (High Risk)

What: Buying shares of specific companies

Risk: Company can fail, stock can crash

When it makes sense: If you're knowledgeable and willing to research. Still, most should stick to index funds

Example: Apple, Microsoft, Tesla

Bonds (Lower Risk, Lower Return)

What: Lending money to government or corporations

Return: 3-6% typically

When to use: As you get older and want stability. 60/40 stocks/bonds is common for retirees

Bitcoin & Crypto (Emerging Asset Class)

What: Decentralized digital currency

Risk: High volatility, regulatory uncertainty

Potential: Hedge against inflation, uncorrelated to stocks

Allocation: 1-5% of portfolio if you understand the tech and risk

Learn more: Bitcoin Sovereign Academy

The 100 - Age Rule (Simple Approach)

Formula: % in stocks = 100 - your age

Example:

• Age 30: 70% stocks, 30% bonds
• Age 50: 50% stocks, 50% bonds

Why: Stocks are volatile but grow over time. Bonds are stable. Younger people have time to recover from crashes.

Three-Fund Portfolio (Bogleheads Method)

Popular among smart investors for simplicity and performance:

• 60% U.S. Stock Market: VTI or VTSAX
• 30% International Stocks: VXUS or VTIAX
• 10% Bonds: BND or VBTLX

Rebalance once per year. That's it.

1. Panic Selling During Crashes

The mistake: Market drops 20%, you sell everything, lock in losses

The reality: Markets always recover. Every crash in history has been followed by new highs

What to do: Hold and keep buying. Crashes are sales on stocks

2. High-Fee Funds

The mistake: Paying 1-2% annual fees on actively managed funds

The reality: 1% fee over 30 years = ~$200K less in retirement on a $500K portfolio

What to do: Choose index funds with <0.20% expense ratios

3. Trying to Time the Market

The mistake: Waiting for the "perfect" time to invest

The reality: Time in market > timing the market. Even pros can't predict tops and bottoms

What to do: Dollar-cost averaging. Invest consistently regardless of price

4. Not Starting Early

The mistake: "I'll start investing when I make more money"

The reality: Starting at 25 with $200/month beats starting at 35 with $500/month (due to compound interest)

What to do: Start with ANY amount now. Even $50/month matters