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IDEAS. STRATEGY. TACTICS. INNOVATION. INSPIRATION.

A Primer To Building Personal Wealth



Many of us mean to get more financially savvy, but put it off for various reasons - the concept is overwhelming, someone else in the family has been handling ( eg a partner), or it just feels too late in the game to dive in. Lisa Erickson, SVP + Head, Traditional Investments Group at U.S. Bank Wealth Management wants to help. In this Masterclass Moment, she breaks down finance basics, such as why a financial plan takes priority over creating an investment strategy, the differences between Mutual Funds and ETFs and other important cornerstone ideas, so you can get comfortable with creating a stronger financial future. Plus, we've added some end of class Q & A questions you might find helpful.


Over 40% of women feel that they are in a better spot as far as how they manage their financial wealth than their parents did. That's a very positive thing. Additionally, compared to men, only 16% of women worry about making ends meet compared to a higher percentage for men. But what's interesting is when you juxtapose how women will talk about what we would call outcomes--how do they actually feel about where they're at, and then contrast that with actually going through the process, you hear a very different story. When we talk to women, what we actually hear is while women feel okay about where they're at, the process of getting there is not easy. Almost 50% of women associate very negative words with thinking about finances and investing, words like fear, inadequacy and stress.


There are two concepts to be aware of here: financial planning and investing. The first question that comes up is: what stock should I buy? That's a very natural question. And it's a good question. But before we even get to the hottest stock tip, step back and think about your plans and goals. It's all about that concept of financial planning.


Step 1--Make A Financial Plan: A financial plan is simply taking a look at the different elements of your budget and asking how those future goals relate back to your current income and assets. Then putting that all together to find the gaps.


Step 2--Consider Investing: Investing is being able to purchase into an asset with the hopes that it will grow into the future and is the step you take once you make a financial plan. The first step is always figuring out your goals. What am I aiming for? And what time frame am I hoping for to meet that goal? Those plans and goals can fold into a complete financial plan to determine your direction.


What are types of investments can you get involved in?

  • Real assets are more physical assets such as a house, a rental property, or gold or silver. The common characteristic of real assets is 1) You own something physical that you can touch. 2) Their return tends to be driven by supply and demand. Let's just take houses, for example. Housing prices depend a lot on how much people want to buy into a particular area versus the supply of homes. The supply and demand for any particular real asset is what's going to determine its return. But in addition to that, some real assets, but not all also have an income component. That's where rental property is a great example. You can also earn a steady stream of income from certain types of real assets. So it has both components of return.

  • Debt Securities or Bonds. To give an example of how debt versus equity (stocks, see below) works, lets use as an example, a potential new company owner. Let's say I've come up with a great new widget, and I'm just convinced this is the next thing that's going to storm the nation. Debt investing is a loan, where you as a potential investor are willing to loan some of your hard earned capital so that someone, say the widget maker, can go out and start their business. In exchange for that, I agree to pay you a monthly interest rate. Essentially, I give you a physical or electronic security called a bond, where I promise to pay you, say 6% interest for you loaning me $1,000. A primary characteristic of a bond investment is it tends to be more driven by the income component of return. While there is a risk that I could default and my company doesn't make it, most of the time, if you buy a higher quality bond, meaning one that's issued from a financially strong company, it will continue to pay his interest over time so you get that steady stream return.

  • Stocks. Let me explain the contrast between a bond or debt security and stocks, or equity. Let's say that instead of you giving me capital in the form of a bond, you actually are very convinced that I've just come up with the most amazing widget and you actually want to become a co-owner in my business; that's where an equity or a stock comes in. So stock owners essentially own all the residual value of the company once the company pays its other obligations. Equity owners have the opportunity for a lot of upside. If the company proves very successful there can be a lot of value after paying all those expenses, or there is risk because not every company makes it. Because of this, equity securities are best utilized in longer term horizon situations, where people want to go for a little bit more return, and can also handle potentially more risk because not every single equity security will work out.


When we talk about investing, there are other key terms that get thrown around like mutual funds and ETFs. Here's how these particular concepts relate to those three asset types we just talked about: real assets, bonds and stocks. Mutual Funds and ETFs don't overlap with real assets, bonds and stocks. Instead they are different kinds of pool vehicles, like mutual funds, that refer to a collection of individual different types of investments.


A pooled fund takes individual securities and bundles them into one vehicle that then multiple investors invest in, and those investors share proportionally in the fund. Let's say we each have $100. Rather than you buying stock A and me buying stock B, we want to get more diversification. So we both decide to invest in XYZ Mutual Fund, which is a stock investment fund. We will each own half of that mutual fund and have shares in the individual securities that are put into that mutual fund. There are several benefits to pool vehicles, one being that pool vehicles allow the opportunity for more diversification by investors pooling their money into a particular mutual fund, and, they can have access with that same amount of dollars to a more diversified range of investments.


They can also be a very affordable way to invest with one fee - you go into that particular fund as opposed to individual transactions where you're paying trading. They can also provide liquidity; you can buy into and buy out of a mutual fund daily. We actually recommend that most of our clients make most of their investments through pooled fund vehicles. Even for me as an individual professional, it's very difficult to cover the whole universe of bonds and stocks and different kinds of real assets. I focus instead on finding the pooled vehicles that may be most relevant for my financial situation.


How do you pull all of these investments together?

There are two parts to building your portfolio.

  1. The first part is deciding how you want to divide your portfolio among the three main asset classes--real assets, stocks and bonds.

  2. The second is investment vehicle selection. It's a matter of doing some research to find individual pool vehicles or securities that work for you. And once you combine that, what percentage should you have in each of the three asset classes, along with which specific vehicles or pool? Then you bring it all together in a portfolio.


What is asset allocation? How much risk tolerance you should have, is something a financial professional can help you think through based on your allocation to stocks versus bonds, versus real assets. Once again, you have your goal set to help you determine where you should go in terms of dividing your portfolio among different kinds of investment types.


  1. Mutual funds are often the most common type of pool vehicles. You can purchase daily into and out of a mutual fund and get that diversification, plus most mutual funds are managed on an active basis where the money manager is actually trying to beat the market by picking individual stocks or individual bonds they think will perform better. So it's active in the sense that they're actually trying to outperform, rather than give you broad exposure to what the market return is in that area.

  2. ETFs are very similar to mutual funds. The main difference is that most of them are managed on a passive basis. What that means is rather than trying to make active decisions to outperform - stock X vs stock Y, they simply buy a broad basket of securities to match the market return.


Common Mistakes Investors Make.

  1. Overpaying for mutual fund fees. One common mistake people make is simply going on the recommendation of a friend (and there's nothing wrong with the recommendation of a friend) and not spending enough time to consider the cost. Every dollar you pay out in fees takes away from your return. Spending time researching the fees a mutual fund charges can make a big difference.

  2. Just Not Getting Started. Even for myself, it's easy to put off checking in with my portfolio and making sure it's up to date for my changing circumstances. Getting started can make all the difference in reaching or not reaching your goals. The reason why is the concept of compounding. Compounding simply means the earlier you get started, the more advantage you have. The reason being that every period your money is invested, you earn a return, but that return is not just on the original investment into your portfolio, but on the profit from that last period too. For example, I start today with $100, at the end of the year, just to keep the math simple, I earn $5, so that I go into year two with $105. In year two, if I earn another 5%, it compounds not only on the 100, but the five, so now I'm earning 5%, on $105. If you just extrapolate that over many years, you can see how that little bit of incremental return you get on what you earned last year really can make a difference.

As you consider what makes sense for you, the bottom line is to find an advisor who is a good fit. There are really two ways to think about that. One is the service level you need given we all have very different financial situations and you don't want to overpay for things that aren't required. Second is finding someone or a service type that is comfortable for you, whether it's totally online, an advisor, or even working with a friend who can coach you.


And finally, some resources. At US Bank we have a website, a free resource called Financial IQ, which empowers people to be able to look up terms and concepts and articles on different topics. Another great resource is a fun website, NapkinFinance.com.


Masterclass End Q + As:


What is the minimum amount of savings you'd recommend having in order to start investing? An emergency savings fund is always critical to ensure you have enough backbone resources should those unexpected events happen. Then you commence on your investing plan. Generally, we recommend your emergency savings of least 3-6 months of your income. Then that's when you would want to begin thinking about other goals.


Should one invest while having a mortgage or focus on paying that off first before diving into something new? Generally, you do want to minimize your debt. But certainly nowadays, with housing prices the way they are, it's more typical that most of us will have to take on a mortgage to have a house. So our best advice would be to make sure you have the most advantageous mortgage you can in terms of interest rates, but to go ahead and save alongside that for some of your other goals.


Which investment has the highest interest rate? Generally riskier bonds have higher interest rates. To give a couple of examples of riskier bonds, or what we would call higher yielding bonds, these are issued by companies that just aren't as financially strong. Amazon is a great example. Amazon has a lot of cash flow and you don't have to typically worry about their ability to repay their bonds, but you may have other companies who've been stretched. That's what would we call a high yield bond, because the credit quality of that bond is just not as stable.


Is it ever too late to begin investing? How do I build when I'm over 50? How to catch up on retirement savings at 50? I encourage everyone just to get started. Don't get discouraged. And with regards to age, if you have fewer years to reach your goal, that gives you a little less time to make that compounding work. But again, you'll be surprised if you sit down and just spend a little time doing your homework, how much progress that you can make.