Types of Investment Accounts

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Introduction to Investment Accounts.

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Welcome back to Pave Academy! Today, we're stepping into a new realm - the 'how' of investing. Let’s start with different types of investment accounts. The three that are important to be familiar with are brokerage accounts, retirement accounts, and education savings accounts. Each of these accounts has its unique characteristics and benefits, and today, we'll delve into the pros, cons, and specifics of each. Ultimately, you will better understand which account best fits your financial goals.

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What Are Brokerage Accounts?

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First up, brokerage accounts. These are held at investment firms and usually reference taxable investment accounts. They can carry a variety of investments, but it's important to remember that any gains or losses could have tax implications. In a brokerage account, there are two ways of managing your portfolio. You can actively manage your portfolio by buying individual stocks and actively managed mutual funds.  You can passively manage your portfolio by buying an index fund or a lower-fee alternative in one or more ETFs.

Just remember if you have a gain in these investments, you will be subject to capital gains tax. If you hold a trade for under one year, it is taxed at your ordinary tax rate as ordinary income. If you hold it for longer, then it is taxed at the capital gains rate, which is zero for gains below $45,000 if you are single and $90,000 if you are married and file a joint tax return. Above there, it is taxed at 15%. Your goal is to be taxed at 20%, the rate applied on any long-term capital gain over $500,000.That means you are doing so well you don’t mind the higher tax bracket. Dividend income is taxed at the long-term capital gains rate.

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What Are Retirement Accounts?

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Next, retirement accounts. These come in a few flavors, like employer-sponsored 401(k) or Individual Retirement Accounts, better known as IRAs. In most cases, these let you contribute pre-tax money and let it grow tax-deferred until you withdraw it in the future. Think of them like financial time capsules, where your investments can grow undisturbed by taxes until you open them up in your golden years. 401(k) plans are often available where you work, and your employer can contribute and match your contributions. The money you put into the retirement account is deducted from your income, and thus not subject to federal taxes, so you are incentivized to save.

A special mention here for Roth IRAs. You make after-tax contributions in this account, but the account grows tax-free, and withdrawals are tax-free after a certain age. It is painful to pay the tax now, but you are not taxed at the time of withdrawal (after age 59½). You end upstarting with a smaller amount to begin the compounding process, but the number you see in the account as it grows is entirely tax-free from that point onward.

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What Are Education Savings Accounts?

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Lastly, let's talk about education savings accounts. These are designed to cover parents' educational expenses. Contributions to these accounts are often tax-deductible, and withdrawals for education costs are usually tax-free. Your investments can grow in these accounts until it's time for college or university fees.

Choosing the proper account depends on your financial goals, timelines, and the tax advantages you seek. Usually, it's wise to max out accounts with tax advantages before putting money into taxable accounts. And remember, there's no rule against having multiple types of accounts in your lifetime.  It can be a great way to diversify your financial plan.

That wraps up our introduction to types of investment accounts. Stick with us as we continue to pave your path to financial awareness.

How Could an Investment Account Impact You?

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Prioritize, Plan, Pursue

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Hi everyone! Let’s continue exploring the various investment accounts we reviewed before and understand the consequences of investing in each of these accounts. With an assortment of options available, your account choice hinges upon your financial goals, the timeframe you're working within, and the tax advantages you hope to gain.

In investing, there is a popular mantra: prioritize accounts with tax benefits. This sentiment typically means maxing out your retirement accounts like 401(k)s or IRAs, including the Roth versions, before moving money into taxable accounts like brokerage accounts. Tax advantages of the former mean significant savings over time, giving your money more room to grow.

Now, let's think about the timeline of your goals. Are you saving for a dream vacation next year or a comfortable retirement decades down the line?  Short-term goals, like a vacation, might be better suited to a taxable brokerage account, which offers more withdrawal flexibility.

Long-term goals might find a better home in aptly named retirement accounts that benefit from the long-term impact of compounding over extended periods.

Additionally, consider who the money will be used for. If you're planning for your child's education, an education savings account could be your ideal choice, acting as a dedicated source to pay for education. This nest egg may be tucked away for years, filling with contributions that grow tax-free, only to be unlocked when the college years roll around.

Remember, diversification is the key to withstand the unpredictable waves of financial markets. So, be thoughtful in having different types of accounts. It is an intelligent strategy for spreading risk and maximizing gains.

Type of Individual Stocks, Mutual Funds, Index Funds, ETFs

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Large Caps, Mid Caps, Small Caps

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In Topic 3,  we will explore investment options: individual stocks, mutual funds, index funds, and ETFs. Let’s start with individual stocks and how they are traded.

In the equity world, stocks are categorized by groups. In an earlier module, we discussed growth versus value stocks. Other ways to look at stocks include classifying them by capitalization, location, and sensitivity to the economy.

A publicly traded company is listed on a public stock exchange and has a stock price determined in the open market. A public company’s size is ranked by its market capitalization. This is defined by multiplying its stock’s price by how many shares individuals and institutions hold or the number of” shares outstanding.” Companies with a large market capitalization of over $10 billion are called “Large Caps,” companies with a $2 billion to -$10 billion valuation are “Mid Caps,” and those below $2 billion are called “Small Caps.”

Large Cap stocks are the giants of the stock market and grab investors’ and the financial press’s attention. Companies such as Apple or Microsoft are deemed“ Mega Cap,” with market values that can exceed $1 trillion.  A company 1/100th the size of the Mega Caps can still be considered a Large Cap stock (because a company with a  $10 billion market capitalization fits into the Large Cap category). These tend to be big, international businesses with well-known brands. Due to their size, stability, and predictable growth, many investors prefer them for their portfolios.

Mid Cap stocks, while smaller than Amazon, often have a strong growth potential. So, if they execute their business plan diligently, they can become Large Caps someday. These stocks offer a balance between the stability of Large-Cap stocks and the growth potential of Small Cap stocks. They could be Large Caps that have lost some of their appeal or Small Caps that have grown.

Small Cap stocks may be riskier due to their size and volatility, but with calculated decisions and a diversified portfolio, these investments could yield high returns.

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International Stocks & Emerging Markets

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Next, we journey beyond U.S. borders to International Stocks. These stocks can operate just in their own domestic market or could have a global reach, such as Toyota.  There are opportunities out side the U.S. in developed markets like Germany or emerging markets like Brazil. These stocks have an additional layer of risk for U.S. investors based on the particular economic and financial dynamics that can impact their competitiveness.  There is the additional currency risk since these stocks trade in their local currency, which can fluctuate versus the U.S. Dollar. There are many mutual funds and ETFs that can offer exposure to these countries.

A fascinating and potentially profitable subset of international stocks can be found in the Emerging Markets. They provide opportunities for substantial gains if they are timed correctly. Emerging Markets present an exciting prospect for those seeking high-growth opportunities, albeit with a higher risk level. The following Module is dedicated to understanding stocks - stick around to dive deeper!

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Cyclical Stocks

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The degree of sensitivity a stock has to the general economy classifies it as a“ Cyclical” or a “Defensive” stock. A retail company such as Macy’s can see large fluctuations in its revenues, and therefore, its stock price is based on whether the economy is growing or contracting. A company such as Colgate-Palmolive, which makes toothpaste and dishwashing soap, among other necessities, is seen as defensive. Unlike clothing, which people may hesitate to buy if the business outlook is bleak, people still need to brush their teeth and buy other household staples. In good times, cyclical stocks tend to out perform, but in a recession, it is always good to have a portfolio that is represented by companies with a very steady revenue stream.

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ETFs, Index Funds, Mutual Funds

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In an earlier Module, we discussed Index Funds, ETFs, and Mutual Funds.  Investing in an index fund is like betting on the overall market rather than individual stocks. Many investors favor this method as it removes guesswork and simplifies investment management.

Lastly, we have ETFs and Mutual Funds. They provide a way to invest in a broad market sector or even the entire market, helping mitigate risks associated with individual stocks and providing a streamlined investment experience. These funds allow you to invest in international, emerging market,  cyclical, or defensive stocks.

Remember, your investment choices should align with your unique financial goals and risk tolerance. Remember, Pave Academy is here to support you on this exciting journey.

How Do You Build a Personalized Investment Plan?

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A Roadmap to Your Financial Future.

Welcome back! We're on the final stretch of our journey exploring the exciting world of investments. In this topic, we'll delve into how you can create a personalized investment plan – a roadmap towards your financial future.

To craft a strong investment plan, you need a good understanding of your goals,  risk tolerance, time horizon, and financial resources. Creating a sound investment plan is like preparing for a marathon; it’s all about the preparation!

When getting ready for a marathon, you set two main goals. One is to get to the finish line, and the other is to get there in a certain amount of time. Your financial goals, whether saving for retirement, a home, or a child's education, should also center around timely completion.

Risk tolerance is akin to your pace. Some people want to push their pace, tolerating more risk for potentially larger rewards. Others may prefer a more reserved tempo, opting for safer investments that grow over time. Knowing your risk tolerance will guide the volatility you can handle in your portfolio.

The time horizon acts like the distance of the race. A longer time horizon can tolerate more volatility because if something unfavorable occurs that causes a market downturn, you will have the opportunity to recover and still meet your goal.  More time means more opportunity.

Finally, your financial resources, similar to your energy reserve, will dictate how much you can invest after ensuring a secure financial base, like an emergency fund.

Remember, investing is not just about making money but about making your money work for you in line with your life's goals. And we're here to help you do just that. Until next time, stay savvy and invest wisely!