Tips Every Investor Should Know
We interviewed Erik Garcia, a certified financial planner. He sat down with us and gave us 5 tips that every investor should know. The video is above and the transcript of our conversation is below.
Today I am here with the awesome Eric Garcia, a certified financial planner, and also a chicken lover, Eric and I often geek out on chickens and growing things. So that’s really why I like him, but he is also an awesome financial planner. So Eric real quick, introduce yourself and tell us a little bit more about what you do.
I love chicken. I was, um, I was actually smoking a whole chicken. And I had let the live chickens just kind of wonder the yard. So I’m pulling, I’m pulling this like whole raw chicken out of the container. That’s been marinating in as my three chickens walk up to me. I felt a little, I felt a little guilty.
I felt a little guilty that they had to see that, but, you got to let them know who’s in charge. That’s my hobby backyard. Chickens is my hobby. My, my profession, I am a certified financial planner. Like you said, Michael, um, financial advisor, you know, we work with, with clients investing their stock market investments.
We help clients make good financial decisions. About their money, whether it’s retirement or debt and so on and so forth. Most of the cohost of the podcast, the stuff about money, they didn’t teach you in school. Okay. Yeah. It’s a fun project. So you can check it out or your, your viewers can check it out, check it firstname.lastname@example.org or any, um, any of their podcast listening apps and we’ll link it down below as well.
So everyone get. So great. Uh, so you sound like the perfect guy to tell us what every investor needs to know. I think you’re going to give us five tips today about what we all need to know to be good investors. Yeah. Five tips. Um, yeah, I don’t know if I’d call them tips. So like, like you’re not you’re not going to get eaten if y’all are watching this expected.
Hot takes or, you know, what’s the hot company that need to put my money in to become a, uh, you know, uh, an overnight millionaire. What’s that next meme stock. You’re not going to get that here, but what, what, uh, what I want to leave you with, what I think are very, uh, core principles that I think if you follow as an investor and understand, let me say, understand these concepts as an investor, you’re going to have a long term investment success.
Millionaires are not made overnight. The stock market is a place where you grow your wealth over time. It’s, it’s one of the greatest tools that we have to build our wealth over a period of time. Okay. Got it. Got it. So that’s what we’re going to talk about. We’re not going to get rich overnight, but it’s going to be sound.
This stuff is sexy, man. This is not the sexy bro. All right. Cool.
All right, so, so number one, every investor needs to understand the importance of diversification. All right. So it’s like, it’s like that old. You know, you probably heard someone said like, don’t put all your eggs in one basket. Speaking of Bayless, this is actually a good, good story here.
Eggs in one basket. So got the chickens. Yup. And sometimes I get lazy. I don’t collect their eggs every morning. So, you know, it was a few days before I’d collected their eggs. I went out. To collect their eggs. There was like six or seven eggs that had collected in their roost over, over a few days. So I had gym shorts on with big old pockets.
So I’ll put all the eggs in one pocket, right. So you know where this is going. I’ll walk back into the house and I’m walking past the piano and I’ve got these eggs in my pockets of my, you know, my pockets sticking out a little bit further than normal and, uh, walked right into the piano. So I had like five of the eggs, just like crack in the yolk was running down my leg.
It was terrible. So don’t put all your eggs in one basket, all like that, gone like that. So diversification, the idea of diversification is we’re spreading our investments across different types of investments. Okay. In the stock market, we think about stocks and bonds, right. And the reason why that’s diversify diversification is because stocks, when stocks tend to go up, bonds tend to suffer and vice versa.
Okay. So the key word and diversification. Is investments that are uncorrelated or oppositely correlated, you know, up down to kind of even out our, our returns now, even within like stocks, we can diversify across company types. So I’m an, I’m a tech investor. So I’m going to buy apple. I want to diversify, I’m going to buy apple and Microsoft own diversify, more on blah, apple, Microsoft, and Google.
Well, we diversified across companies, but now we’re in one industry technology. So we can, we can diversify across. Industries, you know, I’m going to buy oil or energy and technology or healthcare and banks. Okay. And the same thing with bonds, there’s different types of bonds. They react a little bit differently.
Short-term bonds, long-term bonds. Um, so again, the key is we want assets that kind of move that don’t always move the same way at the same time. Makes sense. And then you can think of like, you know, we’re business owners, you know, further diversification as we invest in our business. And, um, let me say this business owners, if you’re watching this and you’re a business owner, we’re the worst at diversification because we have all of our eggs in like the one basket of our business.
You’re absolutely right. Yup. It’s going to make sense to, to some degree when you’re first starting out, you’re a small business owner. That’s your baby, right? You want to put all your money in to that too, to be able to. So they diversify you. Can’t diversify a little bit of money. It’s really hard to.
So number one is investors need to understand the importance of diversification number two. And this is probably if you take away anything from this conversation, if you can understand. Power of compound interest. Uh, yes. Yes, you will do yourself a huge favor. So let me read to you really quick. What some really smart people smarter than me said about compound interest real quick.
So this has Ben Franklin. He’s known for his quips, right? Benjamin Franklin. He said, so compound interest it’s money makes money and the money that money makes money. Got it. Right. So like I invest money to do. The owner earns a rate of return or interest rate for the year. And then next year, if I keep that money invested with the money that it earned, all that earns money.
And then in the third year, all the money that was earned in year one, two, and the original money is earning money. And you do that over a long period of time. That’s compound interest. So it’s like a snowball. Going to snowball, right? Yeah. It’s exponential growth. Think of it this way. There’s a rule. We call the rule of 72.
Okay. This is just a really easy way to kind of, you know, I have money today. How much is it going to be in some future period of time? So like what the rule of 72 says, you take the amount of interest or return you can earn. Divided into 72. That’s how long your money’s going to take the double. So for example, if I have a thousand dollars today and I’m sitting in the bank earning, let’s be generous earning 1% in the bank.
Okay. We’re being generous. 72 divided by one is 72. It’s going to take me 72 years for my thousand to double. Okay. If I invest it in. Uh, something a little bit more risky, like the stock market, and talk about risk here in a second. And I can earn let’s just say 10% just to make the math easy on my money.
72 divided by 10 is 7.2. My thousand dollars will double in 7.2 years. Got it. Okay. So re. Real simple. Okay. So the more time you have, uh, the more time your money has to grow and the more risk you’re willing to take with your money, you can earn on your money. That’s just going to continue to snowball, like you said, and grow exponentially.
So if you’re young and you’re like, Hey, I only have like 50 bucks a month to invest. It doesn’t matter. You need to start a bestie that because over time it’s going to grow exponentially, essentially. Yeah. Let me see you if you’re like, when you say young, young is so relative, right? If you have a 10, if you have a 10 plus year time span, like you can really take advantage of compound interest.
That’s you haven’t, you haven’t lost your chance, even if you’re listening to this and you’re not quote unquote young, I’m doing air quotes. If you’re not watching, if you’re just listening, um, you shouldn’t be discouraged if you’re in your fifties and be like, oh, it’s too late. I can’t take advantage of compound interest.
There’s still time. You said. No, this is why it’s so important. You know, I’ve talked to people who’ve like, let’s say they they’ve left the job in the past and they’ve got a 401k or an investment account or retirement account that they, that they’ve lost track of. Right. They’re just, they don’t know how it’s invested.
In like 10 years later, they opened up a statement. They’ve been sitting in cash for 10 years. Uh, it was like, oh my gosh, you got to keep track of all this stuff. So take advantage of, of. In growth. That makes sense. So here’s what Warren buffet said. Warren buffet said my wealth has come from a combination of living in America, some lucky genes and compound interest.
Wow. Let me just kind of wrap up compound interest with this. So let’s say you have $10,000 today. Okay. And you have 30 years. So retirement. Okay. Okay. Now I’m just, I’m going to use for, for illustrative purposes, 7.2% per year in your account, because if we divide 7.2 into 72, it gives me 10. So it’s going to take 10 years for my money to double.
Got it. Okay. So like, so if I have 30 years and I have $10,000 today yup. I’m earning 7.2 per year on. In 10 years, I’m going to have 20,000. Got it. Right. And then in another 10 years I’m going to have 40,000 because my tennis turned to 20. Yup. And then that’s when he’s going to double. Yup. And then you can see how that just continues to grow exponentially.
So compound interest, super powerful take advantage of it. If you’re young, this is why when, when I get calls from people like, oh, I need to take, take out, you know, a premature distribution from my retirement account or I’m on. Wipe out my retirement account because for whatever reason, um, I’m like, oh my gosh, you’re, you’re, you’re, you’re shooting yourself in the foot because you’ve lost the greatest tool.
So essentially, I mean, once you start, whatever money you put in that, in you’re trying to create. Compound with compound interest, you should plan on never touching that that’s there touch it. You need to attach purpose to your money. So like if you’re putting money away and the purpose is to, let’s say launch a small business in the next two years, or to put a down payment on a piece of property.
Well, you know, you’ve got to invest it accordingly, but if you’re investing money for the long-term. Yup then. Yeah. Forget about it out of sight. Out of mind. Absolutely. 100%. Got it. So it’s really important to attach to purpose. That’s a down here in new Orleans, we say something called the Lang yap. And if you were in that lane yet, it’s a little something extra for free.
So we’re talking about five things. Every investor needs to know. Here’s your , here’s your sixth little something extra for free attach purpose to your money. It makes it a whole lot easier to make investment decisions. Okay. All right. So importance of diversification, power of compound interest, number three, understanding impact of your emotions.
Understanding Your Emotions
This is huge man. People. We are, we are people and we are emotional. Yes. In our emotions, our emotions are re. Okay. Our feelings are real, but they’re largely unreliable. I can’t disagree with that. They’re largely liable. And the average person, under-performs the stock market by at least 1.5% per year. On average, these are, these are numbers.
You know, multiple companies have come out with, in fact, Vanguard has done a study and a lot of companies that have come on and done studies Vanguard says that the average investor will lose out 1.5% in market return because of their. Interesting. Oh, I’m scared because the economy is not doing good. I’m going to go to cash.
Let’s do the worst time. Right? We all know buy low, sell high. Yes. The problem with that with investments is when the stock markets high, everyone feels. Right. They caught him. He’s doing good. I’m excited. I don’t want to, I don’t want to sell up there. And when the stock market is when the economy is doing bad, you know, it’s like, that’s where the fear is, but you have to buy into fear and selling to, to exuberance, right?
Yeah. Yeah. So it kind of goes back to what you said, attach purpose to your money, you know, set it and forget it and don’t let those things. Rural once you do the stock market will reward those who stay invested. If your money’s invested for the long-term, then your portfolio should be able to withstand.
Um, March, 2020 event, when you know the world, you know, COVID makes its appearance on the world stage. Yup. Right. Or 2008 event where we have this, this big recession, but, you know, so you have to invest according to purpose for the money. What’s interesting is active investors. So these are investors who are a little bit more, you know, they’re not just setting it and forgetting it.
They’re, they’re a little bit more active. They tend to underperform by a larger margin. Really. We can get to think they’re making more decisions that are driven by more emotions. Makes sense. Um, so I always tell people like, look, I get it. Especially for those of us who are entrepreneurial, sometimes what we want to, we want to take certain risks.
Like we, you know, we read something about this company or that company. Put a little bit of money in there. Um, so I saw, you know, I say we’re humans and we want to, we want to do that kind of stuff. So have some money set aside to play with, if that’s going to help you stay invested in your bigger account.
We were talking about that offline before is, you know, we’re talking about some speculative type investments and you know, it’s money set aside that I can kind of scratch that. Yup. Write your play money play. We call it, call it arcade money. Uh, I went to, I’m not a gambler. I’ve gone to Vegas several times for conferences.
And one year I went to Vegas didn’t gamble, but I dropped a hundred bucks in one night in the arcade, but I was okay with that. I was okay with that because your tone going in, if you lose it, you lose it. Yeah. Yeah. Yeah. I’m going in. I’m expecting to walk out without money. Um, so that’s the, so understand importance of diversification, the power of compound interest, the impact of your emotions on your investing.
Risk Is Everywhere
The fourth thing is risk is everywhere. Now. It sounds like what, what does that mean? Risk is everywhere. Risk is ubiquitous. It’s everywhere. It’s like, it’s like. Electricity or, or, or sunlight when the sun’s out, it’s just everywhere. Uh, we’re more aware of certain risks. We’re comfortable with certain risks or less comfortable with certain risks.
So years ago, if you’re a member, um, down in, um, the Gulf of Mexico that. Oil spill. Yup. Okay. And we’re perpetually getting like tilted with hurricanes, right? Yup. So the CPA refers a commercial fishermen to me. Okay. All right. He’s sitting across where we’re sitting here talking. He’s got some money, um, from the oil spill, BP oil spill, a lot of these guys will be reimbursed, uh, quite a bit of money.
So this, this pile of money to invest. And he says he doesn’t like the stock market. I said, oh, tell me about that. Oh, it’s too risky. I said, oh, okay. Tell me about that. And he starts to tell me about 2008. I said, oh, okay. Yeah. Tell me about that. So we can have a conversation. So I said, okay. We have two investments right here.
We have the S and P 500. And I talked about that is it’s an index that we track that we, when we talk about the stock market, that’s typically what we’re talking. And I said, this is what it’s performed on average over a long period of time. So we can invest your money here, or we can invest all your money in a new commercial fishing operation in Southeast Louisiana.
Which one would you choose? He goes commercial fishing operation. I said, okay, what are the risks associated with that? Well, what do you mean? I said, what, what, what could impact you making money? A hurricane? Oh yeah. Hurricane. Oh, let’s yeah. Well, I bill, I said, w your commercial fishing operation is by far more risky than the stock market, but you understand that you’re comfortable with it.
Yep. Yeah. The people who want to go to cash look, Cassius is safe, but there’s a risk there. The risk is we’re running high, higher than average inflation right now. So literally your money is losing value. So it’s understand risk, understand the risk associated. Uh, the investments that you’re, that you’re doing and manage that risk appropriately.
And I think that in order to completely understand it, you need a financial planner, someone that truly understands it. I don’t think an individual like myself, I’m not in the world. Like you are every day. It’s probably pretty hard for me to truly understand the risk that’s involved in the stock market versus someone like you, you deal with the daily.
I don’t know if you want. So, you know, we talk about risk in two different ways. This is important to know as well. Um, there’s your risk tolerance? What keeps you up at night? Okay. Um, I, I naturally am not a risky person. Okay. Like I T I don’t, I don’t want to lose money. No one really wants to lose money, but like, I just, man, it just, uh, I don’t, I don’t want to lose money, so I tend to be a little bit more conservative just by nature.
Yup. That’s my risk tolerance. But risk capacity says if you do lose money, do you have the capacity to take on more risks? Cause I’ve got some disk. I have capacity to take on more risks, but actually invested is more risky than I would naturally. Based off of just how I feel about risk. I take risks because I know that I have time to recover.
I take risks because we talked about compound interest. I want to take advantage of compound interest stocks perform better over the long-term than other types of investments. I have the capacity to take that risk. That makes sense. So, yeah, you’re right. It’s really important sometimes because you go back to the impact of your emotions, man.
It’s scary. Risk is scary and, and we make bad decisions. If you have a third party person, No, who can kind of, and the advisors are human too good point advisors train themselves, remove risk or to move emotions from, from decisions. Yeah. So, but you just got to understand it. Yeah. And not only that, but you’re dealing with multiple clients, so you, you can come.
Separate that emotion a lot easier than we’re me. I’m only concerned about myself. You get to see it on a daily basis with a number of different people. So it makes it a little easier to separate that emotion. I wouldn’t are you emotional? I’m like you, I don’t like risk. I, I wouldn’t see Michael, get emotional.
Watch this. Hey man. Tell us about your mango trees. I never thought I got emotional until I started talking to people about mangoes. I didn’t think I was being emotional, but people are like, dude, you get really into this stuff and how am I drilling? Yes, I do. That’s the problem? You know, this is it. You get really excited about an investment and you buy more of it and you’re excited, you buy more of it.
Next thing you know, you have seven mango trees and you’ve got nowhere to plant them. Right. There you go, nobody. Well, all right. So, so we we’ve, um, uh, we, we now understand the importance of diversification. We we’ve understood the power of compound interest. We understand the impact of our emotions on our investments.
We’re starting to understand that risk is everywhere. To become aware of that, manage, manage risks, according with what we’re trying to do with our money.
Understand Tax Laws
Long-term the fifth thing that investors need. Investment tax laws. Uh, this gets a little technical here, but I’m going to, I’m going to break it down really simple.
Okay. Cause I’m already stressed out just thinking about it. Yeah. So let’s, let’s not talk about retirement accounts. You’re buying investments, not inside of a retirement account. We’ll talk about that in a second. Okay. If you buy an investment and make a lot of. And then sell it in less than a year, 12 months or less.
Any, any growth on that investment, you pay tax on it. It’s called a short-term capital gain. Your tax is your ordinary income rates. So if you’re a high tax payer, a high income earner, and you have a high tax rate and you decided to buy a man, I just made a ton of money in crypto. I made a ton of money in a game stop or AMC or whatever, and you bought it and you sold them.
You made hundreds of thousands of dollars. You’re going to get a tax bill. At your normal income tax rate. Uh, okay. So, so if you went and bought the big house and the expensive car, or, you know, whatever, and didn’t put some aside for taxes, you are going to be in trouble. Okay. You owe that. That’s only if you sell within the 12 months within the 12 months, 12 months or less.
Now there’s a long-term. Gain. So if you sell after 12 months, so like on the, on the, on, you know, the, the 13th month, the first day of the 13th month and you sell, you’re going to pay gain, you’re still going to pay a tax, but it’s at a lower tax rate. It’s at it’s at the long-term capital gain. Okay. It’s a big deal.
If you’re not, if you’re sitting at a, you know, 25, 30, 30 5% tax bracket and you sell on the 11th of the, the 29th day of the, of the 11th month or the 12th month, you know, and it’s a difference of 10 or 15% and yeah. So understand the tax laws. Okay. Short-term capital gains also. Um, if you’re a mutual fund investor, Mutual funds are generally tax inefficient.
Okay. So when you invest in a mutual fund, you’re literally buying a shared one. You’re pulling your money with a bunch of people. Yeah. There’s a mutual fund is buying all these shares of these companies. Okay. Okay. So the mutual fund manager is buying and selling throughout the year. Boom, boom, boom.
They’re having capital gains. Short-term gains. Long-term gains all throughout the year. Guess who gets to pay those taxes you do as the investor, the mutual fund company passes them on to you guess when they tell you. What that’s going to be sometime like in November or December. So they’re passing these gains to you and you really don’t know what they are.
It’s really hard to plan for it. You don’t own the underlying security. I’m not, I’m not, I’m not dogging mutual funds. We use mutual funds in some specific cases here with our practice, but it’s just something to understand. Mutual funds tend to be tax efficient backs in tax inefficient efficient. That’s interesting.
I never envisioned, I never realized that. So, so in the same way you have capital gains and capital, uh long-term and short-term capital gains. You have also losses. So if you sell something on a law, you can deduct that. Okay. You can take that against gain. So, um, and then the last thing on investment tax laws.
Uh, I said, put aside retirement accounts for a second. I’m going to bring those back here. Uh, retirement accounts are, are great way to take advantage of either tax deferred growth, meaning we’re not paying taxes. Right? I said, if you sell something within 12 months, that’s not in a retirement account, you got to pay taxes on it.
Well, if it’s in a retirement account, you can buy and sell all day long and you’re deferring those taxes onto some future date. Got it. Okay. That future date is when you start to spend the money to take the money out of the account. However, depending on the type of retirement account, Um, you’re either never paying taxes on that money.
As it’s growing, that’s a Roth IRA or Roth 401k, um, or in the case of like a traditional IRA or a traditional 401k, you get a deduction for putting that money in the account, meaning you’re not paying taxes on your contribution. But in that traditional account, traditional 401k or traditional IRA or SEP IRA, depending on what you have, you’re paying a hundred percent taxes on the way out, but you get the advantage of the deduction on the front end.
You pay less today. You don’t pay taxes as you go. Okay. So understanding those tax rules that apply to. Um, buying and selling, um, investments that are not inside of retirement gut and understand the tax rules that apply to a pot of money for your investment accounts is super important. And you know, if you can be a tax efficient investor, that’s gonna win out.
Here’s an interesting stat. Um, I haven’t dropped many stats on you, but for months, We’re not, we’re not again. Let’s put a retirement accounts, decide for a second. We’re talking about investments in taxable investment accounts. Okay. If it’s a 100% stock portfolio tax efficient investing, there’s way that there’s techniques and strategies that you can use to be more efficient in investing taxable money.
So tax efficient Helen’s for one and a half to 2% additional returns. So if you’re an inefficient, if you’re inefficient in managing your, your investments for taxes, it can have the 2% per year return. These, I think this is a study that, uh, I think it was Russell investments put out fascinating. That’s crazy.
And then if we go back to whatever point it was to point number three, about compound. If you’re losing one or 2% every year, because you’re not being tax efficient, that’s huge. And this is, this goes back to, um, and you know, and this is here’s, here’s the, uh, seventh thing that investors need to know.
There’s a lot of, you know, we live in an interesting time, especially if you’re, uh, you know, we live in this world kind of investment space where, um, fees are becoming more. And it should be a conversation. You know, fees need to be discussed and advisors need to be transparent, but there’s this growing idea that fees are bad.
We shouldn’t have to pay an advisor to manage money, and we want to go to these, these cheap investments. These cheap robo-advisors, I don’t want to pay fees, but a good, a good, a good planner. A good investor is going to make up in spades. What you’re paying in fees through tax effective tax management.
Uh, on, on placement, where should you be putting your money? Um, and then also they can help you be a non-emotional investor and keep your money invested. It’s huge. It’s huge. So, um, absolutely interviewed know interview, investors need to know this. You have options out there. Interview investment. Uh, that’s not something that annoys you as an investment advisor or someone comes in in your interviews, you before they, well, I’d love it.
Oh, ask me. I’d love it. Oh, I welcome that. Ask me questions. You should. I want, it’s just your money. It’s it’s not my money. Yeah. Um, because if we hit it off, but, um, and you, you like me, you like my philosophy. You’re going to be a much easier investor for me to map. It makes sense that it’s invested where there’s, there’s a joke in the industry.
We talk about, um, investing, managing investments is easy. Managing investors is more difficult. I could see that as a small business owner with an insurance clients, I could see that how it’s even more, more so on the investment. Yeah. And, and so that’s it, that’s what every investment needs to know. You, you, you understand this stuff, you are going to set yourself up, um, to have the best chance to have success, uh, over time.
I love it. And honestly, I’m not just saying this, but I learned a lot, I think number five, about tax efficiency that hit home with me. I’ve never thought about that. That’s huge. So if you do, yeah. Awesome. Thank you, Eric. Appreciate it. My pleasure. I said. But everything down below. So you guys can reach out to Eric.
Maybe you can interview him. Maybe he’ll be your financial planner. I put all your eggs in one pocket. There you go. Thanks, Eric. We’ll talk to you later.