Getting Started on Your Investment Journey: Key Concepts & Strategies

Comerica Wealth Management

Melissa J. Linn

CFP? SVP, Senior Wealth Planning Strategist, Comerica Wealth Management

Wade Monroe

VP, Senior Investment Strategist, Comerica

Learn the fundamentals of investing with this comprehensive guide. Discover the difference between saving and investing, explore key investment options, and learn how to build a diversified portfolio tailored to your financial goals.

Key Takeaways:

• Investing can be a powerful way to increase your personal wealth and put your hard-earned dollars to work.

• Start by educating yourself on key concepts: the role of investing, types of investments, how returns work and the impact of portfolio investing.

• Maintain a long-term view of your investments to work through the ups and downs of the market.

Investing is essential to every financial success story. From adding to your net worth to protecting your assets against the impact of inflation, there’s a wide range of reasons investing should be a part of your financial plan.

We are looking at the basics. This article includes a breakdown of key investing terms and products. Whether you’ve just had a liquidity event and are looking to be savvy with your new funds, or you’re a teenager dipping your toe in the market for the first time, this guide can help.

Saving vs. Investing

There are three actions you can take with money:

1. You can spend it.
2. You can save it.
3. Or you can invest it.

Saving involves setting aside money you might need to fund short term finances.

For example, it’s important to have an emergency fund that can cover up to six months of expenses. Savings products also include savings accounts, money market funds and CD’s. These products can provide quick cash in the event of an unexpected expense.

Investing, meanwhile, focuses on putting money into financial assets that will help you meet longterm goals. An investment strategy, then, should be based on your needs and objectives. Objectives include events such as retirement, paying for college or leaving a legacy for heirs.

For younger investors, your objectives are likely increasing your money through asset growth and capital appreciation. For older investors, objectives may be more focused on income and cash generation.

In this article, we will explore the distinct types of investments based on different goals and objectives and discuss the importance of risk tolerance and asset allocation.

Investing is the act of purchasing assets that have long-term value. Your investment strategy should align with your needs and objectives.

Key Types of Investments

There are three common investment options:

1. Stocks

What is a stock??Stock represents ownership in a company. As a shareholder of a company, you have the ability to participate in the profits and losses of the company. This can be through capital appreciation and growth in the stock price. It can also be through dividends, which is when a company distributes profits to its shareholders.

Individual stocks would be, for example, Apple, Amazon and Tesla. Stocks can also be grouped into buckets, such as the S&P 500 index.

2. Bonds

What is a bond??Owning a bond means you are a lender to a company. The company pays you interest (in the form of a coupon payment) in exchange for you lending them the money. You will receive interest payments until the date the bond matures. At that point, you’ll receive the final coupon payment and your original principal. You have the ability to sell your bond before maturity in the secondary market.

There’s also sometimes a call provision on the bond that allows the issuer to prepay, or “call” the bond by a specified call date, prior to maturity.

In the market, there are several types of bonds such as corporate bonds, government bonds and municipal bonds. The interest on municipal bonds is tax free at the federal level and potentially tax free at the state and local level if you purchase the bond from your state of residence. If you are in a high-income tax bracket, investing in municipal bonds can be a tax-effective option.

3. Real Assets

What are real assets??Real assets are tangible securities such as real estate, gold or other commodities. They can also include infrastructure or energy related investments. These types of assets tend to serve as diversifiers in portfolios. They can also provide enhanced yield, inflation hedging and, in some cases, attractive total return.

Note: There is a fourth group of investment products called “alternatives.” This product group is more complex and generally not used by early investors. We will cover this group in a future article.

Stocks, bonds and real assets are unique investment products. Each product includes its own risk, return and strategic use.

Investment Returns (How They Work)

How do you make money with investments?

There are three primary types of investment income: dividend income, interest income and growth or appreciation.

At different life stages income and growth play different roles in helping you meet your goals. Younger clients are generally focused more on growth while older clients are generally looking for more interest and dividends to fund living expenses.

1. Dividends:??A dividend is a percentage of profits or earnings of the company paid to its shareholders. Companies may choose to return money to their shareholders in the form of dividends. Some companies pay dividends on a consistent basis, while others pay one-off dividends.

2. Interest:?Interest is money paid to a bond holder for lending money to the company.

• Simple Interest – Interest paid on the initial principal/amount only. Unlike compound interest, simple interest is not reinvested back into the principal
• Compound Interest – Simply stated, this is interest on interest. Compound interest is when the interest earned on the initial principal is added to your principal and the interest is earned on the entire amount.?

Compound interest is a powerful force. It can result in exponential growth of your money over time. For example, if you invest $100 and are promised 5% interest annually, in 2023 you earn $5. In 2024 you would earn $5.25 (105*.05) and so on.

Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who does not, pays it.”

3. Growth/Appreciation

Unlike income, growth is reflected in the moment-to-moment fluctuations of the market. Stock prices rise and fall. Real estate valuations shift. The market is full of movement.

That said, capital gains or losses are not realized or taxable until you have sold your investment.

Many new investors panic in a market downturn thinking they have “lost” their investment. In reality, your interest and dividend income are not impacted by market price. Allowing your income to reinvest, at lower market levels, is powerful. Riding out market fluctuations and focusing on longterm goals is often a strong investment strategy. Comerica’s Chief Investment Officer, John Lynch, says “time in the market is better than timing the market.” He says this because it’s extremely difficult to predict market directions in the near-term, but the market typically grows in the long term. By allowing your money to compound and reinvest interest and dividends over time, you can weather a downturn and come out ahead.

This article is not financial advice. Prior to investing in the market, work with an advisor to discuss the risks and income-earning potential of any investment.

How to Build an Investment Portfolio

A single stock can be a risky investment. But by pairing that stock with others, you can reduce the overall risk to your money. This is the idea behind an investment portfolio.

As you begin to think through your personal portfolio, here are three key concepts to keep in mind:

• Asset Allocation The first step to building an investment portfolio is deciding on the right asset allocation. In other words, how much of each investment type are you going to have in your portfolio? The purpose of asset allocation is to create a diversified portfolio that balances risk and return based on your goals and objectives, risk tolerance and time horizon. The right asset allocation is a significant factor in maximizing returns relative to your risk tolerance.
• Time Horizon A helpful tool in determining your best asset allocation is to identify the time horizon of your goals. For example, is this money being invested to buy a house in 5 years or for retirement in 30 years? Your capacity for risk is directly related to the length of time until you need to meet a financial goal. The longer your time horizon, the more risk you can take as you have more time for markets to recover.
• Risk Tolerance It can also be useful to explore your risk tolerance. Risk tolerance is the emotional side of investing. How comfortable do you feel risking your money to gain a return? Taking a risk tolerance questionnaire is a fantastic way to discover the amount of risk you feel comfortable taking in your portfolio. Risk tolerance questionnaires examine how you would feel in the event of a major market downturn or how well you understand financial markets and products.

As you put together your portfolio, ask key questions about asset allocation, time horizon and risk tolerance.

Interested in Learning More?

As a new investor, identifying your objectives, understanding the different investment options, types of income and your appropriate asset allocation is key to meeting your financial goals. Educating yourself about income versus growth and understanding fluctuations in the market is key to staying on your course to meet your goals.

Stay tuned for the next article on more detailed investment options, asset class risk, diversification and market cycles. If you’re ready to start investing, reach out to your Comerica Relationship Manager or request to speak with a Comerica Wealth Advisor for next steps and support.

NOTE: IMPORTANT INFORMATION

Comerica Wealth Management consists of various divisions and affiliates of Comerica Bank, including Comerica Bank & Trust, N.A. and Comerica Insurance Services, Inc. and its affiliated insurance agencies. Comerica Bank and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding your specific situation.

This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica Wealth Management does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth Management, including investment banking personnel.

The views expressed are those of the author at the time of writing and are subject to change without notice. We do not assume any liability for losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general educational/informational purposes only and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product, or as personalized investment advice.