Students at Mesa College had a chance to listen to Paul Lim, of LPL Financial, and a San Diego Financial Literacy volunteer, give a lecture about investing, while providing real-world examples along the way.
Lim began with examples of athletic trainers and musicians, dealing with how to get the most results out of the least effort. Investing is in the same vein; investors want the biggest possible result with the smallest amount of effort.
Lim went on to bring up a big question: Why invest? The reason to do so is that if, for instance, someone invests $40,000 a year for 25 years, that person will have $1 million come 2042. However, at 6 percent interest, only $18,226 is needed.
The other big reason: inflation. The costs of goods and services go up every year. Lim’s example: $1 million now, at 4 percent inflation a year over 25 years will only be worth $375,000 in 2042.
And that’s not all: college tuition, something most people struggle with already, increases at double the rate of inflation. On top of that, long-term health care, which will only get more expensive as 10,000 baby boomers retire per day. These were just a few examples of how inflation erodes purchasing power over the years.
Next, Lim called attention to a sheet from BlackRock Financial, which served to show how a diversified investment portfolio might reduce risk in the market. Lim claimed that investing in large cap core (S&P 500 companies) and large cap growth (smaller companies, but with much potential) have various levels of risk.
To go along with that, international stocks have their own brand of investment risk. Those stocks were doing well during the 2008 financial crisis, while large cap core and large cap growth weren’t doing so well.
To complement this, he had a handout called an “investor profile questionnaire” from LPL Financial. Lim said, “there are no right or wrong answers. The number of points you get determine whether you’re a conservative or an aggressive investor.”
In addition, he talked about the bond market, and the kind of risks they represent. He talked about government bonds, and the ratings that companies like Fitch & Moody give them. The lower the grade, the lesser the value (the worst being “junk bonds.)”
To conclude, Lim gave three points of advice: First, one should save about 10-20 percent of their income. Second, one should have a cash reserve, the ideal amount being equivalent to three month’s worth of living expenses (gas, food, rent, etc.) Finally, one should have a 401k or another retirement plan. It will help said person in the long run.
The long and short of it is that investing brings risks, but also rewards. Put money in, get money out.
The SDFLC has been lecturing about financial literacy to students all throughout the semester, and this is the tail end of their talks.
They will return to Mesa one last time on May 9, to do a Q&A panel for students.
More information about what they do can be found at www.sdflc.org.
