Staying ahead of the market article When the stock market crashes, people often blame the crash on the stockholders.
That sentiment is wrong, says Scott McDaniel, director of the retirement savings program at the University of Pennsylvania’s Wharton School.
In the financial world, the crash is the market, and the crash comes after a long period of trading.
“In the financial markets, you can be trading for months,” McDaniel says.
“And you’ll eventually stop.
So you’re not going to go into a panic.
You’ll just take a breather and figure it out.”
In the investment world, investors are typically expected to wait until stocks recover before taking a big position.
“It’s like, ‘Wait a minute.
I don’t know what I’m going to do now,'” McDaniel explains.
“The market is going to keep going up.”
If you’re a new investor, it’s important to understand the basics of investment theory.
There are three basic types of investments: equities, bonds, and fixed-income.
Each is a different way to invest.
For example, equities are investments that return the investor a certain amount of a company’s stock.
Bonds are investments in a company that earn interest.
Fixed-income is investing in an asset that pays a certain rate of interest, typically at a fixed rate.
“That’s where the difference between stocks and bonds comes in,” McDaniels says.
Bonds also offer a better return than stocks when stocks crash, because they are tied to a fixed source of income.
“A bond pays a higher interest rate than a stock, but it’s tied to something,” Mcdaniels explains.
For the purposes of this article, we’ll focus on equities.
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The basic idea behind equities is that the longer you hold the company, the more value you’ll get.
When a company goes bankrupt, you lose a large portion of your investment.
If you invest in an equity-backed company, however, the equity-based company will pay a smaller percentage of the company’s income.
For every dollar you invest, you’re guaranteed a 2 percent return, McDaniel adds.
“You’re paying a higher return, so you’re getting more return,” he says.
The same holds true for bonds, which pay interest as long as the issuer maintains the company.
“If you’re investing in a bond-backed, equity-only company, then you’re taking on the risk of losing the bond if the bond goes down,” McDan says.
If a company went bankrupt, the company would have no equity.
If the company had a bond, however the bond would pay a much higher rate of return.
“Now, the bond is actually a very good investment,” McDians adds.
The main difference between equities and bonds is that equity-sustaining companies have higher profit margins and tend to generate higher dividends.
So when stocks fall, you get the benefit of a lower rate of loss.
In retirement, however.
“When you look at an equity company, you’ll have to buy the company with cash,” McDonahes says.
When you invest your own money, however you choose, you are free to invest it in the stock or bond.
And it’s not uncommon to choose to buy a bond with your own cash.
“There’s a reason why people have the idea that they want to buy bonds when they’re young,” McDavis says.
For most people, bonds offer a higher rate to the investor than equities because the company can generate higher returns over the long run.
When stocks fall in a recession, however that’s not necessarily the case.
“I think in a financial crisis, if you buy a company with your savings, you will have to pay the higher cost of capital,” McDaans says.
Investing in a pension fund can also help you save for retirement.
“One thing you can do is get a pension that pays less, and you will be better off than you were before,” McDonalds says.
You can also save your money in a mutual fund, because a mutual-fund has a tax-advantaged account.
McDonas says it’s more likely to be a better deal than an annuity because it’s taxed at a lower tax rate.
If retirement is the plan, however it’s still important to make sure you have the money to make the investment.
“Make sure you’re buying a bond that has a long-term interest rate,” McDevitt says.