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Wealth Growth -- Basic Idea

1. Intro

Ultimate goal is to live by passive income or investment rather than working

System way: guide by ChatGPT

  1. Define Financial Goal
  2. Understand Risk Tolerance
  3. Create Emergency Fund
  4. Educate on Investment Options
  5. Retirement Accounts
  6. Choose Investment Platform
  7. Diversify Portfolio

2. Investment Accounts

Taxable Brokerage Accounts

  • Take advantage of capital gain tax rates

Traditional Retirement Accounts

  • IRAs, 401K
  • Taxed later

Roth Retirement Accounts

  • Taxed now

3. Type of Investments

Money market funds: money sit in the account until invest

Stocks: buy a piece of that company

  • Return come from dividend payment and increase in the fair market
  • Volatile, would generate higher return

Bonds: lending money to that company

  • Return come from interest payments and return of principle
  • More stable, lower return

Mutual Funds: a basket of stocks, but charge an expense ratio

Index Funds: like Mutual Funds, require less expense

4. Order

Limit order

Market order

Stop order

Stop-limit order

5. Practice

Set clear investment goal

  • More precise, easier to sort out the best means
  • Set time limit, the longer, the less risk
  • Evaluate finance

Determine how much can afford to invest

  • Exclude the emergency fund (few months of mortgage or rental, and other bill)
  • Set a budget
    • A large lump sum
    • Investing smaller amounts at set times each month

Appraise the tolerance of risk

5.1. Cost of Investing

Commissions and fees

  • Trading commissions
  • Maintenance fee
  • Service fees

5.2. Stock Selection

Blue chips

Dividend stocks

Growth stocks

ETFs

6. Tax-Efficient Investing

Two account

  • Taxable account: regular account
  • Tax-Advantaged account: IRA/401K/Roth 401K

7. Behavioral Finance

Financial participants are not perfectly rational and self-controlled

Concept: mainly 5 concepts, can explain the bais

  • Mental accounting: propensity for people to allocate money
  • Herd behavior: mimic the majority
  • Emotional gap: decision based on extreme emotion
  • Anchoring: attaching spending level to a certain reference
  • Self-attribution: tendency to make choices based on overconfidence in one’s own knowledge

Bias

  • Confirmation bias: should look for more information
  • Experiential bias: should look forward
  • Loss aversion: when loss, just quit, don’t expect go back
  • Familiarity bias: should diverse

8. Economic Cycles

Circular movement of an economy, from expansion to contraction and back again

  1. Expansion, uptrend through the expansion stage
  2. Peak: growth hit maximum rate
  3. Contraction: growth slows, employment falls
  4. Trough: hit low point