Stock Market Investments: Red Money
This week we are continuing our talk about different stock market investments as we talk about red money, stocks, bonds, mutual funds, ETFs, and more.
When I was a kid, I loved going on rides at fairs or amusement parks, the more spinning or going upside down, the better! I use to think that the adults that sat on the side just didn’t know how to have fun! But then I became an adult and the older I get, the less spinning I can handle! How about you?
Just like our tolerance for rides changes over time, so does our risk tolerance.
3 Investment Objectives – Growth, Liquidity, and Safety
First, there are really three things that we can be looking for when investing; liquidity, growth, and safety.
Whenever you think about investing, you have probably considered these three objectives. Maybe you’re looking for somewhere safe to store your money, while also having the access to it. Maybe looking for it to grow as much as possible for the future. Maybe you want less risk and stable growth so you can take an income from it…
We’re looking for one of those three things, and again, there’s no method of money management or investment that meets all three of these investment objectives perfectly.
We covered yellow money last week (you can read Investment Vehicles: What Is Yellow Money? here), next week we will cover green money, but we’re going to talk about red money.
When we are thinking about yellow money, we want something safe and liquid, but we intuitively know we can’t keep all of our money in yellow because the growth rate isn’t even keeping up with inflation, so we jump over to red money.
Red money is stock market investments in one form or another. Whether it’s the stocks, mutual funds, ETFs, bonds, etc… Red money has the ability to go up, so we have growth potential, but it also has the ability to go down, so we do not have safety.
Now inside of red money you can be more aggressive or be more conservative, but it is still red money because there’s no guarantee or safety that comes with investments.
Types of Red Money – Stocks, Mutual Funds, Bonds, ETFs, REITs, and More
With red money the one thing that we’re looking for is growth. You don’t have safety and although there is normally liquidity (depending on how you are invested), the money isn’t immediately available if you need it for emergencies. (This is where your yellow money comes into play.)
The overall goal of red money is to net gains.
Now, when you are younger and you’re working and saving for retirement, you’ve probably been putting a lot away into different funds. When you’re in your 30’s and 40’s, that isn’t such a big deal. You don’t really pay attention to the risk and you think that money will be there later when you need it.
However, as you get closer to retirement, the gains and losses that you can experience with invested money become greater. You don’t want to be quite so volatile anymore.
Once you’ve built up to where you have over $100,000 or more in your red money, then the funds that you might have used up until this point become very inefficient to be able to get what you want, and that is especially true when you’re getting close to retirement.
There’s a shift that happens as you creep closer to retirement where you don’t care about high growth but would rather preserve what you have with steady growth. (If you want to read more about this shift, check out Shifting Into Retirement).
I Don’t Understand My Financial Advisor
It’s important to know not all red is created equal and probably as you get closer to retirement or after you’ve reached $100,000 or more in red money, it’s good to look at how it’s being managed.
The key question here to ask is how is your account being managed? If someone says they’re managing your money, what does that really mean?
I was just recently talking with someone who came in because he had asked his advisor a question and the advisor talked for 15 minutes, but never answered their question.
So, if you are paying someone to manage your account in red, which, unless you are doing it on your own, you are paying someone. Whether you see the fee or it’s hidden and coming out of fund fees, you are paying someone.
Whenever someone is managing your money you need to ask them how they are managing it. If they can’t explain it to you in a way that’s easy for you to understand that should be a red flag.
We do lots of reviews for people to help them understand what they have. If what you have is good, it will be obvious and if it’s not, then you to understand why.
It depends on your situation, where you’re at in life, and what your goals are, but as we go through the colors of money I want you to think about all of the different stock marketing investments.
How much would you put in each category?
Download select chapters from our book, including The Colors of Money to learn more about these different investment worlds and how advisors work in each.
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