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SELLING SHORT

Definition

Selling short aka short selling is when an investor thinks a stock will go down so they "short it". Essentially, the investor borrows shares of stock or another asset he or she doesn't own, sells it, pockets the money with the promise to replace the property someday, and hopes the asset declines in price so it can be repurchased at a lower cost, the differential becoming the profit.  They make money on a dip!

Why It's Important

During the financial crisis of 2008, short sellers were making money in the market while everyone else was losing.  A great movie that details what happened is "The Big Short".  Be careful when short selling because if it's not done right, it could bankrupt you!  Keep in mind that you are borrowing shares so if the stock goes up you will be in debt to the broker you borrowed from.

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ASSET ALLOCATION

Definition

Asset Allocation is an approach to managing your investments that involves setting parameters for different asset classes (bonds, real estate, cash, stocks, etc.)  It involves setting a percentage of each kind to hold in order to reach your investment goals.

Why It's Important

Planning your asset allocations is a lot like budgeting.  There are a multitude of different resources available to see what your target asset allocations should be based on your age, income, and retirement age when planning for retirement.  Generally, the younger you are, more of your portfolio should be invested in stocks.  As you get older you would start transitioning your portfolio to more bonds as they are a less volatile investment.  This video may help you to develop a strategy for yourself.

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REITS

Definition

REITs are Real Estate Investment Trusts.  They allow you to invest in different types of real estate.  REITs are available on the market for any real estate niche whether you want to invest in hotels, apartments, commercial buildings, etc.

Why It's Important

Most people think the only way to invest in real estate is to buy a house or rental property.  REITs are traded on the stock exchange (just like stocks and bonds) to take advantage of the volume of people coming together to invest in bigger projects.  They offer another form of diversification in your portfolio.

Be sure to invest in liquid REITs sold on the exchange and not illiquid REITs that are hard to get rid of!

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COMPOUND INTEREST

Definition

Compound interest is interest added on to the principal on a deposit or loan so that the added interest also earns interest and so on and so forth.  

Why It's Important

I think Albert Einstein said it best, "Compound interest is the eighth wonder of the world.  He who understands it, earns it... he who doesn't... pays it."  If you start with $1000 in the bank and it gains 10% a year,  the breakdown would look like this:

Year 1: $1100
Year 2: $1210
Year 3: $1331

That's compound interest!

For the technical people it's formula is 

A = P(1 + \frac{r}{n})^{nt}
A = final amount
P = initial principal balance
r = interest rate
n = number of times interest applied per time period
t = number of time periods elapsed

 

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DIVERSIFICATION

Definition

A risk-reduction method by which you spread your assets among many different investments.

Why It's Important

In the event of a downturn in the market, having sufficient diversification can help you not take too much of a hit.  It is pretty much the adage, "Don't put all your eggs in one basket"!

What to Diversify?

  • Your Marketing and Business Strategy
  • Your Personal / Agency / Companies Portfolio
  • Your Employed Capital into separate, well versed investments. (Which helps "diversify" the risk
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FEDERAL RESERVE

Definition
The Federal Reserve is the central bank of the U.S.  It conducts monetary policy (print more money, raise interest rates, etc.), regulates banks, makes sure the financial system remains stable, and provides financial services to U.S. banks, foreign governments and the public.

Why It's Important
The Federal Reserve directly affects the interest rates you pay on your debt and the interest rates you earn on your savings.  This year they have raised the Fed Funds rate 2 times from 1.5% to 2%.  You may have noticed your interest rates changing, this is why!  Keeping an eye on "The Feds" decisions can indicate what your next move should be!  I bought my house when the Fed Funds rate was 0.75% in 2017.  Now, I am locked into a low interest rate compared to what's available today! 

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