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6 Investing Strategies You Think Will Work, But Won't - YouTube
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hey guys it's chelsea from the financial
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diet the less that regular consumers
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know about how money actually works in
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our society the easier it is to profit
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off of them thankfully though now
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investing is more accessible than ever
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and more affordable than ever but this
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does also mean that you'll hear a lot of
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competing advice about the right way to
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invest today we're going to talk about
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some investing strategies that sound
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like a good idea but probably aren't and
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what you can do instead number one is
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making investment decisions based on
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scary market news
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last spring people were freaking out
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about the drops that they were seeing in
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the market and wondering if that meant
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they should pull out of things like
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their 401ks or other investment accounts
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and when that happens it's totally
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understandable to feel anxious about it
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this is your money and in many cases
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your nest egg that you're talking about
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and when you can log into your various
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portals and see that your net worth has
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dropped by huge amounts in such a short
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period of time the impetus to want to
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react is totally human but what you
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absolutely should not do at any cost is
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to react to scary market news or dips in
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the market by taking your money out of
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the market the most important thing to
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keep in mind about a strong sustainable
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investment strategy is that it is for
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the long term and these short-term
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fluctuations really don't matter and
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more importantly missing just a few of
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the top performing days in the stock
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market could end up costing you
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enormously over your entire investment
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window according to jpmorgan's guide to
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retirement report if you invested ten
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thousand dollars into the s p 500 on
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january 3rd 2000 and left it completely
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invested until december 31 2019 you
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would have received an average annual
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return of just over six percent your ten
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thousand dollars would have grown to
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thirty two thousand four hundred and
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twenty one dollars this twenty year
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period of time includes roughly five
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thousand days during which the stock
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market was open but if you had missed
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just the 10 best days out of those 5 000
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you would have less than half as much
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money miss the best 20 days and you'd
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barely have made any money at all over
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20 years and you'd have lost money if
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you missed any more winning days thanks
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to the magic of compound interest the
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longer your money stays in the market
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the longer it has to grow and those
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various fluctuations that might happen
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on a given day on the long road to
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growing your investment should not at
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all be what you react to when making
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your investment decisions using an
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investment account to save for shorter
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term purchases one of the biggest rules
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of thumb when it comes to investing is
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to not invest any money that you can't
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afford to lose in the short term as we
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said earlier keeping your money invested
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in the long term is crucial to building
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real wealth and capitalizing on the
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larger trends of the market but in the
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short term nothing is guaranteed here at
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tfd for example we believe in that
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golden rule of keeping three to six
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months worth of living expenses in your
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emergency fund which should always be
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liquid meaning accessible at any moment
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that's in places like your average
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high-yield savings account for example
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liquidity just really refers to how
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accessible any given asset is in terms
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of its ability to be converted into cash
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without affecting its value obviously
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cash being the most liquid because it's
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already cash something like a home you
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may not be able to sell it at the right
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price or something like investments you
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may have to take out at a low point in
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the market and it can be tempting when
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we're saving for something that's like
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medium far away for example if you're
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looking to buy a home in the next few
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years and want to build up a quick down
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payment
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to try and capitalize on the increased
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returns of investing in the stock market
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versus something like a high-yield
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savings account but the truth is that
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you could be pulling that money out of
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the market because of your needs when it
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comes to home buying at a time when the
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money is way lower in value than it
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otherwise would be if you happen to need
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the money when the market is at a dip
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you are now obligated to do what we
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talked about in the first point which is
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taking your money out at a bad time and
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doing what we refer to as locking in
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your losses those returns are tempting
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but they only work on a long time scale
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number four is buying a lot of stock in
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one company a lot of people still have
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the misconception that investing
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primarily refers to buying stock in a
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given specific company and using things
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like market news to help influence those
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decisions but the truth is that market
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news can often be counterintuitive for
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example hearing that a certain stock is
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up might make you think oh i should go
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buy that when really you might just be
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getting at it at a higher price than you
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otherwise would have to individual stock
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picking in some cases has worked for
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people and can theoretically work but
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for the average retail investor it is
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incredibly difficult to game your
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investment choices in a way that is
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going to outperform the market if it
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were easy to do a lot more people would
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be doing it and even professionals have
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a very difficult time consistently
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producing better returns than market
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average and this is especially true if
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you're making a bulk of your investment
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decisions based on the big flashy news
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items which brings us to that whole
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gamestop debacle tfd's resident
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investing expert amanda holden did a
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great explainer video about this on our
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instagram which we'll link you to in the
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description but here's a brief
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explanation what hedge funds were doing
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was practicing short selling instead of
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buying gamestop stock they would borrow
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it the way you can borrow essentially
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any type of capital with short selling
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you only need to return the same number
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of stocks you borrow no matter what the
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value is so hedge funds were borrowing
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these gamestop stocks selling them and
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assuming that they would drop in value
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so that they could buy the stocks back
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and then return them to the lender they
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predicted that because gamestop as a
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company is becoming more and more
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obsolete the price of the stock was
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going to fall dramatically however this
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risk did not pay off redditors
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collectively came together to throw a
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bunch of money at the gamestop stock to
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drive the stock price higher and mess
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with those hedge fund bros now the hedge
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funds were in a place where they had to
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buy back extremely expensive stocks to
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the tune of millions of dollars which
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they then needed to return to the bank
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but the takeaway of this is not to do
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what the redditors did or to practice
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short selling like the hedge funds
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though some of them were able to profit
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the majority were not and will not any
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stock that has an absurdly fast increase
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in value is likely going to have an
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equal and opposite come down and
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speculating or making decisions on
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short-term greed is not the right way to
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build long-term wealth and this applies
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to buying any individual stock not just
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the ones you hear doing well in the news
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in fact one study found that only about
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one in three stocks performs better than
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the average and even warren buffett one
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of the most successful investors of all
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time suggests funneling stock
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investments into an s p 500 index fund
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which is a type of mutual fund that
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follows the performance of 500 of the
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largest public companies in america
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rather than picking individual stocks
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heavily investing in individual stocks
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that you're trying to game and
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understand in order to edge out the
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market is not diversifying your
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portfolio and is opening you up to huge
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risks we'll link you guys to a video in
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the description that explains all about
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these concepts and how to set up your
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portfolio to be diverse and healthy
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number five is only contributing to your
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401k up to your employer's matching
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limit if your employer offers a 401k and
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offers to match it up to a certain point
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you're already in a great place when it
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comes to saving for retirement employer
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matching basically means that your
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employer will contribute a certain
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matching amount to your retirement
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savings based on what you yourself are
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saving from your paycheck this is often
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a perk that comes at companies a little
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bit later into your tenure often to
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incentivize longer term loyalty from
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employees about 56 of companies that
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offer the match give it to employees
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when they start another 24 requires that
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they have one year of service before it
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begins but if your employer offers it it
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is essentially a free money benefit of
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your job however with the federal limit
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on 401k contributions each year being 19
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500
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it is likely that your employer is not
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going to match all the way up to that
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limit about 71 of companies with
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matching contributions contribute 50
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cents for every dollar employees
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contribute up to six percent of their
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pay another 21 match employee
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contributions dollar for dollar but the
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maximum is normally lower commonly about
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three percent so say that your employer
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offers a standard six percent match of
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fifty cents for every dollar you
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contribute and your salary is sixty
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thousand dollars six percent of your
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salary would be thirty six hundred
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dollars so if you contribute that much
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your employer would match at eighteen
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hundred dollars making your total
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contribution fifty four
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but that still keeps you well under the
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contribution limit of up to 19 500
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especially when you consider that your
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employer contributions do not count
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toward your 401k contribution limit you
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don't have to max out your 401k
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especially if you can't afford it but do
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remember that the money you invest
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earliest in your life is going to have
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the biggest chance for growth most
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experts say to put at least 10 to 15 of
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your pre-tax income toward your
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retirement funds so if your salary is 60
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000 that would be saving six to nine
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thousand towards retirement lastly
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number six is limiting your retirement
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to what your employer provides on the
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other hand you should not limit yourself
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to feeling that whatever retirement
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program your company offers to you is
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where you should stop your retirement
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savings
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especially obviously if your employer
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doesn't even offer a 401k a report from
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the stanford center of longevity found
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that just about half of american
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households are offered work-based
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retirement benefits through their
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current employers now there are many
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practical issues with tying retirement
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plans to employers which i frankly don't
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even have the time to get into right now
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but one of the problems is that the
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contribution limits are often much
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higher in employer offered accounts such
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as 401ks than in individual retirement
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accounts such as traditional and roth
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iras the current annual contribution
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limit for a 401 k is 19 500
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for a roth or traditional ira or
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individual retirement account it is six
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thousand dollars the catch is that while
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essentially anyone can open an ira the
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type depending on your income as roth
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iras have an income limit you can only
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open a 401k if your employer offers it
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as a benefit however if your employer
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does not offer a 401k that does not mean
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you can opt out of finding your own
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strategy to retirement savings and doing
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it as soon as possible to maximize the
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benefits of staying in the market longer
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and enjoying that sweet sweet compound
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interest additionally even if you do
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have a 401k and are maxing it out you
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don't need to stop there now this is
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likely advice for when you're furthering
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your career and earning more but you can
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open a tax advantaged ira in addition to
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your 401k and if you are maxing out your
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401k but it's still not meeting that 10
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to 15 of your income rule you need to
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look into more vehicles for placing that
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money for retirement we'll link in the
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description to an article all about what
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to do when you're maxing out your 401k
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and as always thank you for watching and
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do not forget to hit the subscribe
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button as well as to come back every
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monday tuesday and thursday for new and
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awesome videos
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goodbye
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