Money 101: What are stocks and bonds

que CRE three financial advisor Kelly Brothers here helping you make sense of stocks and bonds. We'll start this question. Why do we invest anyway? Why don't why do we put up with the ups and downs of the market? I would just stick it in a bank and go get it when we need it. I'll tell you why. Inflation inflation is like a cancer, a cancer that actually eats away at the purchasing power of your hard earned money. And you know what? Years ago, Matt, not a matter. Think about the history of retirement planning. For example, 100 years ago. People live till the age of about 50. So what they do, they work their tails off till they fell over and die 60 years ago. 50 years ago, you'd retire at 65. He had a pension. Social Security was fully funded. Medicare was fully funded. You took three cruises and he died at 72. But today, today a couple walking into a financial adviser's office and sitting down. If they're relatively healthy, there's a 50 50 chance if their age 65 there is a 50 50 chance that one of them hits the age of 90. What does that mean? That means you've got a plan for 30 35 years, and inflation over that time period is gonna eat away at the purchasing power of your money unless you invest unless you put your money at least some of it, into some of the asset classes that have kept up or even beat inflation over time. Namely, stocks and real estate. Be the two biggest so stocks and box. How do you remember which is which? What do they do? Stock If you own stock in a company? Uran, owner of the company. If you own a bond from that company, you're a loner to the company. So stock owner bond loner stocks what we want to concentrate on right now. Let's talk about stocks for just a moment because if you own the stock, well, first of all, understand that if one stock is priced to $20 and another stock is priced at $100 that does not tell you anything relative to the value of those two stocks. It just doesn't because it's based on something completely different. How do you value a stock? The number one way to valued is what's called a price earnings ratio P E ratio. What does that mean? That is means what are you paying for cash flow next year, the year after the year after that. So at the beginning of this year, the P E ratio on the S and P 500 I was about 17 times. Quite simply, That means that you were paying $17 for $1 of earnings next year. Bonds are a different animal. You're a loner to a company or a loner to a government. You by a 10 year treasury, you give your money to the government. They're going to give you less than 1% per year for the next 10 years and then give you your money back. Obviously, the upside return on that is not all that high. But bonds are a decent piece of diversification. What does that mean? That means if you have a diversified portfolio, so when the market drops 20% you're not completely exposed to all that and your losses, much less so Let's organize the investment universe, shall we? You've got stocks, you've got bonds, you've got hard assets, which includes real estate gold and you have cash or cash equivalents like CDs. So those are the asset classes that are out there, whether you're calpers with 500 billion under management or whether you just want to put $5000 to work and invested. So you got your four different main asset categories. Now, how do you pick what the bright mixes for you and your personal situation? One of the key determinants of what makes you pick has to do with time horizon. How much time do you have? Let me give you two extreme examples. Number one. You're 30 years old and you have your 1st 401 K or your IRA. That is money that legally you can't touch without a penalty for 30 years. 30 years. You take risk with that money, you put it into stocks. You you invest for the long term because, you know, over the long term, stocks will outperform or historically have outperformed bonds and cash. However, let's say you're that same 30 year old, and now you want to save a few bucks to put away for a down payment on your very first house. You put that in the market. No, your time horizon is short. Maybe you want to buy a house within a year. A year and 1/2. You put that money into something safe cash or CDs or a very short term bond fund. You keep it safe so that you could move when you find the right house for you. Two very different time horizons. Two very different investment philosophy. So let's go back to the why Why are we investing? If it's for retirement and your retirement 2025 30 years off, you need to take risk. You need to take risk because that's the only way you're gonna beat inflation and be able to live the life in retirement. You'd like to live. If the money is for short term needs, though. If it's a rainy day fund in case you lose your job or if you're saving for that first down payment on a house, then you don't take risk. You want that money there the day you need. We appreciate you taking part in this lesson, and here's why. Financial literacy is really important to us personally and as a society, so we don't make bad decisions, so we make good decisions. So we give ourselves a chance, have a real retirement and have real financial security over time, no.