Money Rehab with Nicole Lapin - Invest Like a Pro in Two Steps

Episode Date: July 15, 2022

DCA, diversification, repeat. If you don't know what that means, listen up, and invest like the pros!

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. There is one and only one truism on Wall Street.

Buy low, sell high. In other words, buy a stock when it hits a low price per share and then sell it once it reaches a high price. Don't take anything else any pundit or analyst says as gospel beyond buy low, sell high, because everything else is rooted in opinion and no one's opinion, even mine, is right all of the time for you. Analysts' best guess is to try and predict the market's future, but ultimately it's just that, a guess. While buy low, sell high works, there is an issue. No one knows exactly what the lowest low will be, and no one knows exactly what the highest high will be. When you decide to buy a stock, you may be plagued with

analysis paralysis. What if I buy the stock today and the price goes down tomorrow? Then I'll essentially have missed out on a better deal and paid a higher price than I would have paid if I just held on a little bit longer. But what if I wait to buy the stock and the price goes up tomorrow? Then I will have essentially missed out on a better deal and paid a higher price than I would have paid if I just acted a little bit more quickly. You can have the same internal dialogue when it comes time to sell. What if I sell a stock today and the price goes up tomorrow? Then I will have essentially missed out on the chance to earn more money by selling my shares when the price was higher. But what if I wait until tomorrow and the stock price goes down? Then I will have missed out on a better gain. Ugh! Help! You can drive yourself crazy, spinning around a merry-go-round of doubt and what-ifs. The truth is, you'll never know with absolute certainty when is the right time to buy

or sell. However, there are some insights and tricks you can use to maximize the chance that you'll get it right or as right as possible. Here are the two most important ones. Number one, opt for dollar cost averaging. And number two, diversify. Let's start with dollar cost averaging. Dollar cost averaging is a way to protect, in finance speak, we call this hedging, against the unknown fluctuations in the stock market. Dollar cost averaging, or DCA for short, is when investors take a total sum of money that they want to invest in a company and put little chunks of that total sum of money into the company at different times instead of all at once. For easy math, let's say you have $12,000 that you

want to invest in a company, let's call it the money rehab company, because you don't know if today's market price of the money rehab company shares is going to be the lowest point ever, or if you'll get a better deal later on, you hold off on putting all that $12,000 in on the same day. Instead, you put $1,000 every month in for a year. The average of where you buy in every month will likely average out to split the difference between the high point and the low point. I am not promising you that that will definitely work out, but it will give you the best shot at success. And that's really all we could ask for, for anything we do on Wall Street. The zillions of variables will do their thing. You are never going to have total

control. The most successful investors know that, which is why they opt into dollar cost averaging. Now let's talk diversification. Whenever I open my TikTok, which is rare, I have to say, but I still do, I always see videos of tween finance bros saying things like, so-and-so stock is so hot right now, the new crypto is about to take off, blah, blah, blah. I want to debunk that kind of thinking right now. If you're interested in long-term investing, long-term growth, you don't want your investing strategy to rest entirely on one so-called hot stock. Again, the stock market relies on way too many constantly changing factors for us to be able to predict with absolute confidence which stock will blow up, for better or worse.

The best strategy is to not find the perfect, dreamy big hoonuna of a stock, but to build a portfolio around diversification. Quick dictionary note here, your portfolio is the finance-y term for the group of stocks and bonds and other investments you have. Another dictionary definition for all of you who are thinking, WTF is diversification. Diversification is basically the investing principle telling you not to put all of your eggs in one basket. The economists who applied this logic to finance won a Nobel Prize, which is absolutely bonkers to me because it's a phrase we all grow up with. It's like winning a Nobel Prize for the advice, if you lost something, check the last place you had it. But I digress. Even though diversification is an idea that is colloquial, it is a prize-worthy

idea when applied to your finances for sure, because it protects you from losing everything. It's sort of like dollar-cost averaging, but instead of spreading out the timing of your investments in order to increase the likelihood of buying them at a good time, you're spreading out where you're investing to increase the likelihood of a devastating loss. Here's how it works. Say you have a hundred bucks to invest and you're going back and forth between kicking it old school and investing in gold or keeping up with the times and investing in cryptocurrency. If you throw it all in crypto, in a perfect world, you make a steady ROI. Let's say your investment follows the stock market at large and you would make about 8% or $8 after a year. But what about a

less than perfect world? If you put $100 in crypto and the currency crumbles, poof, you now have a big old zero in your brokerage account. You lost every penny of your $100 investment. In a less dramatic scenario, if you don't lose everything, but that cryptocurrency doesn't blow up the way the finance bro on TikTok told you it would, you'll have FOMO over not picking a stock that performed better. Here's how diversification would save you in those scenarios. If you put $50 in crypto and $50 in gold, then you increase the chances that you've picked a winner. If that perfect world scenario comes to be and your crypto investment does earn about 8%, you still would have had a solid ROI on your $50 investment

plus whatever return your investment in gold made. That's great. We can be happy with that. But what we can be even happier about is that we've lessened our exposure to risk. Because if the worst case scenario comes true, and that crypto investment turns out to be a catfish, you haven't lost it all. You might have lost 50 bucks, but you still have your $50 in gold to keep you afloat. As this example shows, the payout can be better if you hitch your entire ride to a good investment, for sure. But oftentimes, that risk is much higher than the reward. Remember, in the last example, you risked $100 to gain $8. See what I mean? High risk,

low reward. In that scenario, I choose medium risk, medium reward every time. For today's tip, you can take straight to the bank. An excellent way to build in diversification into your portfolio is to invest in index funds or ETFs. And remember, timing the market is less important than time in the market. So the earlier you start, the more compound interest you can gain over time. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson.

Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.