Catalog / Investment Basics Cheatsheet
Investment Basics Cheatsheet
A concise guide to the fundamentals of investing, covering key concepts, strategies, and asset classes for building a strong financial foundation.
Core Concepts
Investment Principles
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Risk and Return: Higher potential returns usually come with higher risk. Understand your risk tolerance before investing. |
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Diversification: Spreading investments across different asset classes to reduce risk. |
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Time Horizon: The length of time you plan to keep your investments. Longer time horizons allow for more risk. |
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Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. |
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Compounding: Earning returns on your initial investment and the accumulated interest or gains. The “snowball effect”. |
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Asset Allocation: Deciding how to distribute your investments among various asset classes (stocks, bonds, real estate, etc.). |
Investment Goals
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Retirement: Saving for your future financial needs after you stop working. |
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Education: Funding the cost of college or other educational pursuits. |
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Home Purchase: Saving for a down payment on a house. |
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Financial Independence: Accumulating enough wealth to live off your investment returns. |
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Major Purchases: Saving for things like cars, vacations, or other significant expenses. |
Asset Classes
Stocks (Equities)
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Definition: |
Represent ownership in a company. Potential for high growth, but also higher risk. |
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Types: |
Large-cap, mid-cap, small-cap, growth stocks, value stocks, dividend stocks. |
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How to Invest: |
Individual stocks, mutual funds, ETFs. |
Bonds (Fixed Income)
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Definition: |
Debt securities issued by governments or corporations. Generally lower risk than stocks, with more stable income. |
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Types: |
Government bonds, corporate bonds, municipal bonds. |
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How to Invest: |
Individual bonds, bond funds, ETFs. |
Real Estate
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Definition: |
Physical property like land, residential, or commercial buildings. Can provide rental income and potential appreciation. |
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How to Invest: |
Direct ownership, REITs (Real Estate Investment Trusts). |
Cash Equivalents
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Definition: |
Highly liquid assets that can be easily converted to cash. Low risk, low return. |
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Examples: |
Savings accounts, money market accounts, certificates of deposit (CDs). |
Alternative Investments
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Definition: |
Investments that don’t fall into the traditional asset classes. Often less liquid and potentially higher risk. |
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Examples: |
Hedge funds, private equity, commodities, collectibles. |
Investment Vehicles
Retirement Accounts
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401(k): |
Employer-sponsored retirement plan. Often includes employer matching. |
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IRA (Individual Retirement Account): |
Tax-advantaged retirement account. Traditional and Roth options. |
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Roth IRA: |
Contributions are made after tax, but qualified withdrawals in retirement are tax-free. |
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SEP IRA: |
Simplified Employee Pension plan, for self-employed individuals and small business owners. |
Taxable Brokerage Accounts
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Definition: |
Investment accounts where you can buy and sell stocks, bonds, ETFs, and mutual funds. Earnings are taxable in the year they are realized. |
529 Plans
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Definition: |
Tax-advantaged savings plans for education expenses. |
Health Savings Account (HSA)
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Definition: |
Tax-advantaged savings account for healthcare expenses. Can also be used for retirement savings. |
Investment Strategies
Dollar-Cost Averaging
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Investing a fixed amount of money at regular intervals, regardless of the asset’s price. Reduces the risk of buying high. |
Buy and Hold
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Purchasing investments and holding them for a long period, regardless of market fluctuations. Focuses on long-term growth. |
Value Investing
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Identifying undervalued assets and investing in them. Requires thorough research and analysis. |
Growth Investing
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Investing in companies with high growth potential. Can be more volatile than value investing. |
Index Investing
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Investing in index funds or ETFs that track a specific market index (e.g., S&P 500). Provides broad market exposure at a low cost. |
Rebalancing
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Periodically adjusting your asset allocation to maintain your desired risk level. Involves selling assets that have increased in value and buying assets that have decreased. |