STOCK MARKET: SELF-ASSESMENT

Curricular Response:

STOCK VS. BOND

• What is the difference between a stock and a bond?

An ownership interest in a corporation is represented by a stock, which entitles the holder to a share of the firm’s assets and earnings. A bond is a type of financial asset in which an investor lends money to a company or government and receives their money back plus interest. The major distinction between the two is that whereas stocks have a higher potential return but also higher risk, bonds are thought to be less risky but offer lower potential rewards.

• Which security tends to have the best returns?

In general, stocks tend to have the potential for higher returns than bonds over the long-term. Historically, the stock market has had an average annual return of around 10%, while the return on bonds has been closer to 5%. However, it’s important to note that past performance is not a guarantee of future results, and the stock market can be quite volatile in the short-term. Additionally, returns can vary greatly depending on the specific stocks or bonds in question, so it’s important to do your own research and consider your own risk tolerance before making any investment decisions.

RISK

• How are risk and return connected?

The risks and returns of an investment are typically inversely related, meaning that as the potential return of an investment increases, the level of risk involved also increases. This is because investments that have the potential to provide higher returns usually involve a higher level of uncertainty or volatility. For example, stocks tend to have the potential for higher returns than bonds, but they also carry more risk because the value of a stock can fluctuate greatly based on a number of factors such as company performance, economic conditions and overall market conditions.

Bonds, on the other hand, often have smaller returns than stocks but lower risk. This is so because a bond, which is effectively a loan to a business or government, entitles the holder to a regular revenue stream in the form of interest. When the bond matures, the bond issuer has a duty to return the principal to the bondholder.

It’s important to note that the relationship between risk and return is not always linear, and some investments can have a high risk-high return profile, while others can have a low risk-low return profile.

• What are some steps you could take to mitigate risk while investing in the stock market?

There are several steps you can take to mitigate risk while investing in the stock market:

1. Diversify your portfolio: One of the most effective ways to mitigate risk is to diversify your portfolio by investing in a mix of different stocks, bonds, and other assets. This can help to spread the risk across multiple investments and reduce the impact of any one investment performing poorly.
2. Do your own research: It’s important to do your own research and due diligence on any company or stock you’re considering investing in. This includes researching the company’s financials, management team, and industry trends.
3. Invest for the long-term: Short-term fluctuations in the stock market can be more pronounced than long-term trends, so investing for the long-term can help to smooth out these fluctuations and reduce risk.
4. Avoid chasing hot stocks or market trends: It’s easy to get caught up in the hype of a hot stock or market trend, but these investments can be risky and may not have a solid long-term potential.
5. Use stop-loss orders: A stop-loss order is an order placed with a broker to sell a stock when it reaches a certain price. This can help to limit your losses in case the stock price drops below a certain level.
6. Consider working with a financial advisor: A financial advisor can help you to create a diversified portfolio that is tailored to your specific investment goals and risk tolerance.

It’s important to note that diversification, research and working with a financial advisor do not guarantee a profit or protect against loss, but are methods to help manage the investment risk.

BALANCE

• What does it mean to have a “well balanced portfolio?”

A well-balanced portfolio typically includes a mix of stocks, bonds, and other assets such as real estate, commodities, and cash. The specific mix of investments will depend on an individual’s risk tolerance, investment goals, and time horizon. For example, a more aggressive investor with a long-term investment horizon might have a higher proportion of stocks in their portfolio, while a more conservative investor might have a higher proportion of bonds.

Having a well-balanced portfolio can help to mitigate risk by spreading investments across different asset classes and sectors, so that the portfolio is not overly exposed to any one type of investment or market. Additionally, it can help to ensure that the portfolio is able to generate a steady stream of returns over time, and help to achieve the investment goals.

• What is “rebalancing” a portfolio and why is it important?

Rebalancing a portfolio refers to the process of adjusting the mix of investments in a portfolio to maintain its desired level of risk and return. Over time, the value of different investments in a portfolio can change due to market fluctuations, resulting in the portfolio becoming unbalanced. Rebalancing involves buying or selling assets to bring the portfolio back to its original asset allocation.

For example, if a portfolio originally had a 60% allocation to stocks and 40% allocation to bonds, but the value of the stock investments have increased, the portfolio would now have a higher percentage allocated to stocks and lower percentage allocated to bonds. To rebalance the portfolio, the investor would sell some of the stock investments and buy more bonds to bring the portfolio back to its original 60/40 allocation.

Rebalancing is important for several reasons:

1. It helps to maintain the desired level of risk: By bringing the portfolio back to its original asset allocation, rebalancing helps to ensure that the portfolio is not taking on more or less risk than intended.
2. It can help to improve returns: By selling investments that have appreciated in value and buying investments that have underperformed, rebalancing can help to improve the overall returns of the portfolio.
3. It can help to control emotions: Rebalancing forces investors to sell investments that have appreciated in value, which can be difficult emotionally. By doing it regularly, it can help control impulsive reactions to market movements.
4. It helps to take advantage of market fluctuations: Rebalancing allows investors to take advantage of market fluctuations by buying low and selling high.

Core Competency Self Assessment:

1. How much information did you use to help you with your answers?  Did you use outside sources?
2. What is something that you have learned which you have changed your mind about?
3. Has investing become a more approachable or attainable concept to you?

1.

To educate myself and come up with the right answers, I did consult outside sources. However, my father is highly knowledgeable about the market, I did ask him to help me with this area. Overnighting my understanding of the stock market was fairly difficult, but by observing my classmates’ straightforward answers, I was able to obtain a general understanding. I mainly watched YouTube videos because I can’t read for extended periods of time without getting headaches.

2.

I have learned everything and nothing at once; my brain is overloaded with information and needs time to process it. My understanding of money has changed, and I now understand that the traditional approaches such as “work hard, study, get a decent job, and you’ll be rich” are no longer valid. Although it occasionally works, there are other, quicker and simpler ways, such as the stock market. I’ve come to the realization that I want to be wealthy instead of just rich.

3.

I do want to invest and explore the stock market, however I do know that I need to be smart enough first. I would rather do it as a side hobby or side business than as my full-time job. If I do decide to invest, it will be in stocks. I think you either go all in or you don’t go in at all. Because some people refer to it as a fraud, a money cheat-code, quick money, etc., I find it to be quite fascinating. And in my opinion, this is simply the current traditional manner. Like, the traditional methods were cutting-edge in their day, and in the present era, this is the new custom and the “genuine” approach to make money. It demonstrates how individuals must continually adapt in order to remain ahead of the game. From my perspective, the only goal is to make the rich more richer…kind of the whole point right?