Ep 29: Investment Risk Tolerance, HYSA Interest Rates and Fed Balancing Act

Jess: You keep saying that the 5% interest rate on HYSA or high yield savings accounts are not here to stay.

Jessie: I know mine dropped below 5% and I know this has to do with the Fed cutting rates.

Jess: So what does that mean for cash? I know that has something to do with the risk and being diversified.

Jessie: I mean, it's overwhelming.

Jess: I need answers and I think our listeners do too.

Jessie: Jessie, you beautiful gothic sunflower.

Jess: I don't even know what that looks like, but that's what you are.

Jessie: Mars just got me sunflowers yesterday, though.

Jess: This is the right question at the right time, though.

Jessie: Even today, we had CPI, which is inflation measures.

Jess: Later this week, we have PPI, which is another inflation measure.

Jessie: It came in a little hotter than expected, actually, just ever so slightly, but mostly in line with expectations.

Jess: But essentially, all of this economic data right now in this moment in the cycle, which we're about to break down, we're trying to understand when the Fed is going to cut interest rates, which means you're 100% right.

Jessie: That makes short term yields come down, which affects those high yield savings accounts.

Jess: Yeah.

Jessie: So what do we talk about? We need to talk about the risk scale as in different product types, diversification, and more importantly, how it relates to the current environment and how you can actually take action.

Jess: Action-packed episode, which are scale.

Jessie: Let's go.

Jess: You're listening to Market MakeHer, the self-directed investing education podcast that breaks down the stock market from her perspective.

Jessie: That's us.

Jess: We're her.

Jessie: And if you're new here, thank you for joining us.

Jess: And thank you for spreading the word and the really nice messages.

Jessie: We went a little viral, a lot of it viral.

Jess: And we're running this whole podcast essentially by ourselves.

Jessie: Jessie and I, we do the producing, the editing, the marketing.

Jess: Use chat GPT to figure out how to put our website together.

Jessie: So sometimes it gets a little overwhelming, but your kind words make it literally all worth it.

Jess: I cannot say thank you enough in the bottom of our hearts.

Jessie: Yes.

Jess: And thanks to y'all, we're topping all the charts now.

Jessie: So we appreciate you.

Jess: And now for some introductions in case you don't know who we are.

Jessie: I'm sure a lot of you know Jess and Skip, but I'll introduce myself first.

Jess: I'm Jessie Denouy, your guide on this whimsical adventure of understanding the stock market and how to invest.

Jessie: And my job is to ask all the questions you are thinking or too afraid to ask.

Jess: I'm taking one for the team.

Jessie: It's a very noble quest, but I'm here for it.

Jess: It really is.

Jessie: And if you found our podcast via my TikTok, I actually had a ton of comments that says, okay, this is really great.

Jess: It makes some sense, but I need it to make more sense.

Jessie: Welcome to the podcast.

Jess: This is Jessie's job.

Jessie: Here we go.

Jess: And I'm Jessie and Skip.

Jessie: I've been in the industry now for almost 15 years.

Jess: And I'm here to use that experience along my partner in crime.

Jessie: Well, at least business.

Jess: Jessie, to make it all make sense.

Jessie: And by the way, happy Women's History Month, Jess.

Jess: Yay to Herstory.

Jessie: That's right, Herstory.

Jess: We love Herstory.

Jessie: We do.

Jess: You know, I watch CNBC all day, most of the time.

Jessie: They do a survey every year for women in the workforce, and we're actually worse off than we were in 2022 and 2023, which means we have some work to do.

Jess: I was really sad to see that.

Jessie: Yeah.

Jess: Well, the deep dive was because of flexibility.

Jessie: So COVID really helped women be able to find some balance because they could work from home and take the caretaker role, which is really interesting.

Jess: But there's some data around it.

Jessie: The most dramatic change was fewer women secured pay raises, which is very sad.

Jess: It was 39% this year.

Jessie: So there's still women who got pay raises, 39%, which is really great.

Jess: And that's a high number.

Jessie: But last year it was 44%.

Jess: Yeah.

Jessie: Yeah, I know like the pay gap is still very real.

Jess: The gender wage gap is still very real, very there.

Jessie: Yes.

Jess: And so is the investing gap.

Jessie: But if you're here, let's bridge it.

Jess: Yeah.

Jessie: Yes.

Jess: And all are welcome.

Jessie: Everyone, all genders.

Jess: Here we go.

Jessie: Yes.

Jess: All right.

Jessie: Okay, so new concept today.

Jess: What is the risk scale? Make it all make sense, Jess.

Jessie: There is something called the risk pyramid.

Jess: It's basically three layers like you have a pyramid and there's this bigger stuff on the bottom, but it's low risk, medium risk and high risk.

Jessie: So the risk is on the bottom.

Jess: Yes.

Jessie: Okay.

Jess: And high risk always means higher reward, right? Like higher reward, higher volatility, more dramatic roller coaster.

Jessie: We always talk about that you're stepping on.

Jess: So big moves up and down.

Jessie: Yes, exactly.

Jess: And I love the big moves up and down.

Jessie: It's both.

Jess: That's the point.

Jessie: If you have more risk, more potential for reward, but also more potential for downturn.

Jess: We have to find some balance.

Jessie: Yeah, we have a restrictive Fed and a restrictive Fed means that they raised interest rates really, really high.

Jess: They're keeping cash tight.

Jessie: They keep tight.

Jess: Yeah.

Jessie: So we say tight and loose.

Jess: So a tight Fed policy means high interest rates.

Jessie: So it's more expensive for you to get the mortgage, but the intent is to bring down demand.

Jess: All right.

Jessie: Yeah.

Jess: So that's a tight Fed policy or a tight monetary policy.

Jessie: Okay.

Jess: Different products or securities on the risk scale perform better depending on where you are within the business cycle.

Jessie: But the intent of going through this is you understand what's minimal risk, medium risk, and maximum risk.

Jess: The risks associated with the risks.

Jessie: That's helpful.

Jess: But it helps you get some perspective when you layer on the business cycle and then what the Fed's trying to do.

Jessie: Then you understand, okay, well this is where we are within the cycle and we'll explain that a little more.

Jess: This is what the Fed's trying to do because remember the Fed's actions are what tip us into a recession, which is the last part of the business cycle.

Jessie: So certain things perform better in a recession.

Jess: And if we were to get into a recession, the Fed would lower rates, which has an effect on all of them.

Jessie: What is the bottom of the pyramid then? Is it cash? Yeah.

Jess: Cash is.

Jessie: That's the lowest risk? It is.

Jess: We're talking about cash, not just talking about like cash or stashing under your mattress or whatever, but also fluid cash in your checking or savings.

Jessie: And that's a piece of it.

Jess: So we have something called cash equivalents.

Jessie: New word, which is T-bills, which are shorter-term Treasury securities.

Jess: Because those are always like no risk or low risk, right? They're lower risk.

Jessie: It's backed by the full faith of the government and the government's never defaulted on their credit.

Jess: But this is why you look at Moody's and S&P and all of those rating agencies because anytime there is debt, including from the sovereign, it's rated just like we have a credit score that says how well we can pay debt.

Jessie: So does our country and corporations that issue debt.

Jess: But let's keep on the base in the low risk scale because there are some risks associated with that.

Jessie: So your high yield savings account, the biggest risk that it has are these cash equivalents is inflation risk.

Jess: Right.

Jessie: When inflation is high, prices of goods are too high.

Jess: That means generally that demand is too high.

Jessie: So in order to get demand down, interest rates are raised.

Jess: And so it's this domino effect.

Jessie: So inflation is too high.

Jess: The Fed comes in and they raise interest rates to bring inflation down, which has happened.

Jessie: The peak of inflation was at 9.1 and now we're at 3.2.

Jess: That's a huge, huge difference.

Jessie: I know it's come down.

Jess: I know we're all still feeling it, but like it has come down looking at the data.

Jessie: Yeah.

Jess: Still feeling those like lagging effects of it.

Jessie: We absolutely are.

Jess: The Fed's target is 2% year over year, which still means it's going to go up 2% year over year.

Jessie: You just don't want it to go up 9% year over year.

Jess: That is unsustainable.

Jessie: But if it's going up 2% year over year and wages are growing up more than that's that's good.

Jess: But that's another episode at 9% and it's coming down, but it's also going up.

Jessie: So it's like a weird like it's not going to be down as low as it was when it went up.

Jess: Right? Because it should still be increasing that 2% every year.

Jessie: Right? So it's 9% year over year.

Jess: So now it moves every month.

Jessie: It's adjusted.

Jess: So now we're at 3.2% year over year and the Fed's target is 2% year over year, but there's more than just one inflation gauge, which was a question that we're going to do on a Q&A really, really soon.

Jessie: Okay, I digress because we're going to spend a lot of time now.

Jess: The biggest risk with cash is inflation.

Jessie: That's the intent of investing is to outpace inflation.

Jess: Savings accounts used to not have this much interest before the inflation was high a few years ago.

Jessie: So those 5% numbers were like not normal for us.

Jess: No, not at all.

Jessie: Yeah, exactly.

Jess: Now we're seeing them starting to come back down.

Jessie: So it's good if you did have your money in the last few years in a high-yield savings account because you got to reap some of that reward if you had that extra money to stash in there.

Jess: You got to get some interest on it, which was great.

Jessie: But now that's coming back down, you can't just like keep all of your money in these cash type of accounts because you're not going to outpace inflation forever.

Jess: So you need to figure out where you can put your money to outpace inflation over the long term.

Jessie: Yes, so beautiful.

Jess: It's like you set it up for the next thing.

Jessie: There's no script guys, so she didn't even know.

Jess: I love it.

Jessie: I need a visual for my ADHD brain, so this pyramid's helping me.

Jess: I'm like, okay, so we got to step it up.

Jessie: I love it.

Jess: Okay, so we're still in the base though.

Jessie: That's where you can look at perhaps even longer term government bonds or even corporate bonds as well because the inverted yield curve, the Fed is raising interest rates.

Jess: They control the front end of the curve is what we call that, which is the shorter term interest rates.

Jessie: So if you're getting more interest on six months and two years than you do for 30 years, that's an inverted yield curve.

Jess: You should be compensated for time.

Jessie: Right.

Jess: If you have higher interest rates on the short end of the curve, which means just shorter expiration securities.

Jessie: And remember, we're thinking about the business cycle.

Jess: The Fed's actions would tip us into a recession.

Jessie: Now we're not in that part.

Jess: It doesn't seem like in the business cycle.

Jessie: We're in this weird anomaly right now, and I really think it's because of AI.

Jess: If you listen to us all the way, hopefully this makes sense.

Jessie: Cash is also going to change if they lower rates.

Jess: You would want to lock in those shorter term rates if you need some cash and have a diversified portfolio.

Jessie: This is normally an institutional type of strategy, which a mutual fund's an institution.

Jess: This is what they're going to do.

Jessie: They have portions that are cash.

Jess: And so if you have a larger portfolio or if you want some cash equivalents as self-directed investors, this is where you can get exposure to bonds or fixed income products with ETFs or mutual funds.

Jessie: You don't have to buy them directly.

Jess: So you're saying instead of like transferring some of your money out of that high yield savings account, that's the interest rates lowering on, into locking them up in these long term bonds, you can put them in ETFs and mutual funds that include a mix of bonds and other securities instead? Yeah, that's an option.

Jessie: So cash is going to be the lowest risk, but it comes with inflation risk.

Jess: And then if we're going to go a little bit higher on the risk scale, then you're looking at investment grade bonds, or even before that is government bonds.

Jessie: And you lock that in and that will allow you to have better yields.

Jess: And if historically, if we were looking at the business cycle and the Fed's actions tipped us into a recession, the Fed would start cutting interest rates, which is going to affect your high yield savings account.

Jessie: But you would have locked in some better interest rates.

Jess: And what happens when we get into that recession point is equities would underperform.

Jessie: High yield savings account aren't that great, but you locked in really good yield.

Jess: And that is the only investment over time that has historically outperformed the market during a recession.

Jessie: The only one.

Jess: Wow.

Jessie: Now is the time for us to think about our next move.

Jess: Like that's not lasting forever.

Jessie: But if you have that excess amount, you might want to move it into something that will give you a better return over a longer time.

Jess: Yeah.

Jessie: Especially if you're the investor just in cash and scared to do anything else.

Jess: Yeah.

Jessie: The next step, the little baby step, would be bonds with maturities three to ten years or a bond mutual fund or an ETF.

Jess: This is a way to lock in rates if we were in that late portion of the cycle, which I don't think we are.

Jessie: I think we're in early stages, but I wanted to give you the historical bit.

Jess: Yeah.

Jessie: I'm seeing my HYSA rates starting to come down to like 4.15 or something like that, which is still great.

Jess: I'd be happy with that, to be honest.

Jessie: But like it's time to just start thinking of our strategy basically for like what makes sense for us.

Jess: We're all, you know, individuals here.

Jessie: We all have our own personal things going on.

Jess: It's time to start thinking about if these things start shifting.

Jessie: What's my plan? What's my risk tolerance? And what am I ready to do next? Yeah, exactly.

Jess: Because they're going to start looking less attractive.

Jessie: I love that investing is a trend.

Jess: We have record high money markets.

Jessie: This is where it all really goes together.

Jess: So there is so much cash and money markets right now.

Jessie: You can actually pull it on BLS.

Jess: I think it's fred.gov, but one of the Fed websites, you can see money market accounts and it's astronomically high.

Jessie: It's at one of its highest levels.

Jess: But that's also where the wealth effect starts coming into play.

Jessie: So this is why the Fed really has this balancing act that they have to do.

Jess: They raise interest rates to tackle demand, to make it harder to access funds so you don't spend as much.

Jessie: But then as they raise interest rates, cash starts creating more income than it normally does.

Jess: So then you create the wealth effect where people start having more pent up savings.

Jessie: So it's really this this balance.

Jess: But I think it's more supply side.

Jessie: And I don't know why I keep focusing on the Fed because it's been on my mind.

Jess: It's really related.

Jessie: But the intent of today is let's talk about the risk scale.

Jess: So cash, you start with that, your high yield savings account.

Jessie: That's fantastic.

Jess: I just want to prepare you for if the Fed starts cutting rates, it might go to 3%, which is still great.

Jessie: It used to not even be that high.

Jess: So that's that's awesome.

Jessie: If a 1% forever.

Jess: Yes.

Jessie: But you need to watch the CME Fed tool.

Jess: You need to understand how the Fed works, which is what we're going to talk about on our next episode.

Jessie: And then you'll get an indication of when those cuts are going to happen.

Jess: But remember, the market is forward looking.

Jessie: They don't happen until it happens, but it's always anticipating a move of some sort.

Jess: Always going to have a plan.

Jessie: Yes.

Jess: Or you can lock in rates now with different types of funds that give you that exposure.

Jessie: But if you do that, know that you're also increasing your risk.

Jess: That's important to know.

Jessie: It's funny because my best friend, Erin, just asked me this.

Jess: And I was like, well, you know, my high yield savings account that I had money in, I noticed the rates were dropping.

Jessie: So I kind of need to figure out my next move.

Jess: And so this is perfect timing because I wasn't even sure what I wanted to do next.

Jessie: So I need to figure out what risk I'm willing to take with that money and moving it into something else.

Jess: Yeah.

Jessie: And that's why it's good to know the risk scale.

Jess: It's interesting where things fall in here, too.

Jessie: I think it gives perspective.

Jess: All right, going up the risk scale, we're going to get into corporate debt now.

Jessie: We talked about government debt for a little bit.

Jess: Are we in the middle part of the pyramid or like the next level of the pyramid now? Yeah, we're in the lower middle now.

Jessie: Which is high income bonds and debts.

Jess: But you want to look at something called investment grade, which is triple B or higher.

Jessie: Normally your brokerage firm won't even show you bonds that even fall less than investment grade.

Jess: If you go on your brokerage site, they're going to show you all the fixed income products.

Jessie: And that's corporate debt.

Jess: So you can go get a bond from Apple.

Jessie: And Apple's credit rating or bond rating is much higher than triple B.

Jess: Triple B is like your minimum credit score to buy this house.

Jessie: But you don't have to buy the bond directly.

Jess: Just like we say you, well, you can't buy the S&P 500, but you don't have to buy each individual stock directly.

Jessie: You can just buy a fund that exposes you to it.

Jess: That's the intent of funds.

Jessie: You could buy a fund that exposes you to the bonds, if you would like.

Jess: You could just pull a screener and it could be corporate bonds and you just select that criteria.

Jessie: And you select the criteria meaning of like the credit score, quote unquote.

Jess: Yeah.

Jessie: Or you could say I want corporate debt only, investment grade, ratings.

Jess: We'll have to, we need to run through screeners again.

Jessie: But this episode is actually bringing everything we've ever said together.

Jess: It is, I know.

Jessie: I'm like, wait a minute.

Jess: Yeah.

Jessie: Which should show you that it takes a lot to understand the stock market and then get into investing because this is episode 28.

Jess: I've been on this podcast.

Jessie: This is episode 29.

Jess: I've been on this podcast the whole time.

Jessie: And I'm still like putting the pieces together every episode.

Jess: You're doing great.

Jessie: That's fixed income, though.

Jess: That has interest rate risk now because interest rates could change.

Jessie: Might be more attractive elsewhere.

Jess: Has credit risk.

Jessie: That's why we look at the rating.

Jess: It has call risk where you might lock in a really good rate.

Jessie: But then they say, actually, we want to go ahead and take care of our debt and pay it off, which they have.

Jess: They can do call risk.

Jessie: I don't know if we want to open that can of worms.

Jess: Not today.

Jessie: We'll know what that one is.

Jess: So let's keep that in mind for the future.

Jessie: Pulling the pieces together.

Jess: Yeah.

Jessie: They could just call the bond back.

Jess: They could be like, hello, I want you back.

Jessie: Bring you up on the phone.

Jess: Yeah, literally.

Jessie: That's how I remembered it on my exam.

Jess: And they also have liquidity risk, which is just liquidity means volume or lots of someone has to be able to sell it to you for in order for you to buy it.

Jessie: That's what that means.

Jess: We can go through those in a separate episode.

Jessie: It's just the compliance in me that anytime I mention something, I feel like I have to tell you the risks.

Jess: Yeah.

Jessie: Yeah.

Jess: That's the next step.

Jessie: But what's so interesting is people start in high yield savings accounts at the bottom of the pyramid.

Jess: When they go to the middle, they actually go to the upper part of the pyramid, which is equities.

Jessie: But there's actually a lower piece, which is fixed income.

Jess: This is where diversification comes into play.

Jessie: But before we get there, let's let's break them all down.

Jess: So after fixed income, then you're going to get into stocks.

Jessie: Large cap stocks are considered less risky.

Jess: We talked about large cap stocks last episode.

Jessie: Those are just the bigger companies like super big, big.

Jess: Apple is a mega cap that are in lady S&P 500.

Jessie: Most likely.

Jess: Stay with us.

Jessie: We'll be right back.

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Jess: So join us as we navigate the intersection of innovation and humanity, uncovering the stories that will define our collective futures.

Jessie: Subscribe to Modem Futura wherever you get your podcasts.

Jess: We'll see you there.

Jessie: See you then.

Jess: Yeah, that's a criteria to be in the S&P 500 is a large, large cap, right? And you can see that when you enter broker terms website, you'll type in a symbol.

Jessie: It'll say capitalization.

Jess: If it says large, that is good.

Jessie: Yes.

Jess: Think of it like a business.

Jessie: It's a large business, right? A small cap is a small business.

Jess: So when you invest in small cap stocks.

Jessie: So it's a lower price and lower amount of shares outstanding.

Jess: A combination of that.

Jessie: It is literally a small business.

Jess: So that's why it's riskier.

Jessie: Do you know what's on the risk scale next? This one always surprises everyone.

Jess: Yeah.

Jessie: I'm so surprised.

Jess: Yeah.

Jessie: I don't know if you think real estate's low risk, but it's like buy a house, do this.

Jess: It could go either way.

Jessie: It's either going to be a really great investment or like something could go terribly wrong and it's not going to be one, you know? Yeah.

Jess: I was literally talking to my dad about this two days ago.

Jessie: I think it's that generation.

Jess: We've talked about that before.

Jessie: My parents are all invest in real estate, invest in real estate, invest in real estate, not the stock market.

Jess: And they see the stock market as so much more risky.

Jessie: And I think it's because they can touch more like literally petting my wall real estate.

Jess: You can actually put your hands on it.

Jessie: Yeah.

Jess: But they lived in a time post great financial crisis where that was a recession.

Jessie: So the Fed lowered interest rates in response to stimulate the economy.

Jess: And that was a housing bubble.

Jessie: So they were able to buy real estate really, really low and tripled in prices now contributing to our current housing supply issue.

Jess: But I digress.

Jessie: This is literally what I was telling my father.

Jess: Imagine visual of your neighborhood or even go up bring Google Earth, you know, or, you know, you look on Zillow and you see the maps of all the prices.

Jessie: Imagine someone was appraising the house every millisecond.

Jess: And just changing the price of the house.

Jessie: That's literally the stock market.

Jess: It's the same, but it's not.

Jessie: And so you don't know the value of it.

Jess: And you're not checking on it often.

Jessie: And so there's this huge adjustment and there's all these other factors that contribute to the price of real estate like interest rates and supply and demand and consumer health and all of the things that we look at.

Jess: If there's like a school nearby that's an A rating school or maybe it went down a grade or two and like now that is not rated as high people like the kids don't move there or whatever.

Jessie: Like so many little things can factor into that.

Jess: Yes.

Jessie: And this is the point I was trying to tell my dad because he was afraid of the stock market and I finally, finally got him there.

Jess: It's really great.

Jessie: Been a long road.

Jess: The point is though, it's the same.

Jessie: Actually real estate's a little riskier because you have to own it and then take care of it.

Jess: But there's all these other external factors like you just laid out just like there is in the stock market, if not more.

Jessie: And also you can invest in real estate with a fund.

Jess: Everything can be exposed in a fund.

Jessie: Right, the REIT.

Jess: REITs.

Jessie: Yeah, there's REITs.

Jess: They act a little bit differently.

Jessie: We can have an episode on that if you would.

Jess: Yeah, we should.

Jessie: I've been curious about those for a while now.

Jess: Let's do it.

Jessie: Meaning every investment is accessible, but it's an investment nonetheless and it's on the risk scale.

Jess: We're not saying add it to your portfolio.

Jessie: I'm just telling you where it is because there's a very common perception of I don't want to invest in stock market.

Jess: I'd rather invest in real estate.

Jessie: Yeah, I don't know if it's like bad to say timing the market, but I feel like there's a market for everything.

Jess: Real estate's also a timing thing.

Jessie: I bought a house when we were coming out of that 2008 recession and it was still really cheap to buy houses then and I got very lucky that I was able to, even on a very low salary, like under $40,000 a year salary, able to buy a house and kind of like foresee the future of this is a good time to buy.

Jess: It can only go up from here.

Jessie: Yeah, I might have to live in this house for the next 10 years, but I'm willing to do that and I did.

Jess: You kind of have to think about where we're at in the world and our economy and what's going on.

Jessie: Obviously, we can't predict the future, but that's part of a strategy or just paying attention to the world around you and what's happening and what you feel comfortable with.

Jess: The stock market is literally around you and I was even talking to my very best, dear, lovely friend, as I do every day, you know who I'm talking about, and we're talking about rents today and she's just like, oh, these are so much cheaper in this certain area and I'm like, you know, everything's going to work out because the Fed's going to cut rates probably in June.

Jessie: That's what's projected now.

Jess: Obviously, it can change based on the data, but she's not probably not going to move until that time, but that's the point of understanding the stock market and how all of this works because now we can tactically think about our asset allocation and then adjust where we are based on the cycle.

Jessie: Yeah, that should bring everything together and that includes when you want to go purchase a home.

Jess: Yeah, and all the things that play into the stock market that we've talked about.

Jessie: All the things.

Jess: Paying attention to everything.

Jessie: Yes, and it's an election year.

Jess: So I actually want to talk about what happens in an election year.

Jessie: I have an episode on that too.

Jess: Got to keep the task, keep the task.

Jessie: So review.

Jess: Cash, government debt, corporate debt, stocks, as in large cap, it goes by caps.

Jessie: Large cap stocks.

Jess: Mm-hmm.

Jessie: Large cap, mid, small.

Jess: So the smaller the cap, the higher the risk because it's a smaller company.

Jessie: Further removing a pyramid, narrowing it.

Jess: Yes.

Jessie: Yeah.

Jess: Yes, and then real estate.

Jessie: Is that that? Yeah.

Jess: Yeah.

Jessie: I love that.

Jess: I love that.

Jessie: And then after that is over-the-counter securities, so your penny stocks.

Jess: Oh, yeah.

Jessie: We already talked about, I think in episode two or three, how penny stocks are very risky.

Jess: Yeah, and then I disagree with what's on the last part of the pyramid, to be honest, but I also agree with it because it's complexity.

Jessie: If you don't understand this stuff, then it could be very bad for you.

Jess: Alternative assets.

Jessie: Talking about options.

Jess: I'm just like, nope, that's not ready.

Jessie: My brain's like, mm-mm, not ready yet.

Jess: But I promise you the way I describe it will.

Jessie: Oh, I believe you.

Jess: I know you'll be able to teach it to me and I'll be like, oh, but like I feel like I'm still absorbing so much of the basics and where we are at to this point that I'm still marinating.

Jessie: Yes.

Jess: Some of us are, though.

Jessie: We want to really understand every little bit of it before we feel comfortable moving on and that's what we're here for.

Jess: Yes.

Jessie: We're getting there quickly and I appreciate that.

Jess: So the pyramid is alternative assets, which is what? Crypto.

Jessie: Options.

Jess: Futurists.

Jessie: Those of you that are like, oh, invest in crypto.

Jess: That's your riskiest.

Jessie: Remember that.

Jess: It is.

Jessie: Absolutely.

Jess: Higher reward, higher risk.

Jessie: They go hand in hand.

Jess: This is why diversification is important.

Jessie: And you touched on even the risk tolerance aspect.

Jess: So whenever you're considering risk tolerance for your personal portfolio, literally at your brokerage firm, all of them have little tests.

Jessie: You might have seen those before that you can take yourself, but it's going to consider what's your goal for these funds? What's your time? What's your personal risk tolerance? So there's a lot to consider when you're trying to figure out what can I handle or what's my intent of these funds? And there's lots of little quizzes that you can do that are everywhere.

Jess: Then what would happen is you're going to get an asset allocation based on diversification.

Jessie: When you say asset allocation, that's like how much you're willing to put into crypto versus stock versus bonds, basically? Exactly.

Jess: We just went over the different products or assets on the risk scale.

Jessie: So the way that it normally works is I added on crypto and options.

Jess: That brokerage firms aren't going to spit that part back out to you, but it's going to be cash, bonds, and equities.

Jessie: If you increase risk, increase capability of loss, but the purpose of investing and not keeping it in cash is to beat inflation.

Jess: That's right.

Jessie: Yeah.

Jess: Because literally, if you keep your money in your mattress, in your wall, wherever, that money is losing value every year.

Jessie: You want to put it somewhere where it's getting some value back, where you're increasing the value of your money with time, with inflation, and with interest, hopefully.

Jess: And something we're going to link in the show notes, we're actually going to link to FINRA today.

Jessie: They have a whole financial literacy portion of their website, and they have every product or asset and the type of risk that's associated with it.

Jess: So you can go through each one and then understand the risks or how it works if you want a little more information.

Jessie: Lots of details there.

Jess: You needed to know everything else before you got here because you may say, oh, let me start with the risk scale, but knowing the different asset classes is absolutely great, but you need to know what performs well, when, and where, and then how to gain exposure to it.

Jessie: Affected by things going on in the world and inflation and all those things, too.

Jess: Literally, I've taken those risk tolerance tests before and had no understanding.

Jessie: I'm not going to understand math or a test or an equation unless someone explains to me, like, why am I doing this? What is the purpose? How is this all working? I'm going to go take those tests on the brokerage firms again because now I'm going to understand exactly what that means and I'm going to know what all those suggestions actually mean and why.

Jess: You have to take into account all these other things that we've talked about on this podcast.

Jessie: Exactly.

Jess: That's why we say it's a self-directed investing education podcast.

Jessie: You can build this yourself, mutual funds offer you exposure, or you can call up a brokerage firm to have a conversation for free.

Jess: Yeah, this is too much.

Jessie: Just call up the professional, talk to them.

Jess: All right, it is this time.

Jessie: Yeah, let's do a quick recap, though.

Jess: So we're talking about a risk scale of investing and we're talking about it as a pyramid and the bottom of the pyramid is the less risk, right? And that's like your cash.

Jessie: So you have your high yield savings account, your money markets, your CDs, and even short-term cash investments and bonds, six-month, two-year T-notes maybe even.

Jess: That's all the bottom part of the pyramid.

Jessie: Then we get into your fixed income, your government debt, and your corporate debt, which is still the bonds, right? That's right, but government debt is considered less risky than corporate debt.

Jess: Right, so you're like getting a little bit more risky as we go up the pyramid.

Jessie: So government debt is less risky, corporate debt is a little bit more risky, but still those are lower than the next part of the pyramid, which is equities and real estate even, surprise, surprise.

Jess: So we're talking about stocks, we're talking about buying a house, and then of course there's different levels of risk within that part of the pyramid.

Jessie: So your over-the-counter stocks, penny stocks, are much more risky than those large-cap stocks that we talked about before, the big companies.

Jess: And then at the very top of the pyramid are what we call your alternative assets, options first, and then cryptocurrency right now would be at the very tippy-top of the pyramid as the most risky thing you could possibly do with your money.

Jessie: But as we know, higher risk, higher reward.

Jess: Yeah, being diversified.

Jessie: Certain things perform better in certain environments, and a lot of that has to do with the business cycle.

Jess: So if you're early in that growth part, equities are going to do really, really well.

Jessie: As soon as we get to the mid and late, equities start going down and performance still go up, but when you get a recession, typically they go down, whereas your high investment grade corporate debt or government debt, so high quality, would perform better in those type of environments.

Jess: And it's all about asset allocation.

Jessie: And if all of this is overwhelming, because we did definitely graduate today, there's a fund for everything.

Jess: So we need to do an episode on how to find different kind of funds.

Jessie: There's a lot, but it's good to know about other things.

Jess: That's what we're here for.

Jessie: Yeah.

Jess: Yeah, exactly.

Jessie: That's enough risky business for today.

Jess: If you learned something in today's episode or any episode that you've listened to, please share the wealth.

Jessie: That's the best way you can really support our mission of making accurate financial literacy available to everyone.

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Jess: That would be great.

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Jess: We were there when we first launched, so we had that moment.

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Jess: Thank you so much for listening and for the wonderful questions.

Jessie: We have so much content we need to make now, and I appreciate that.

Jess: Bring it to Jessie, and she just refines it.

Jessie: She's like, well, that word, that word, that word, and so it brings everything together.

Jess: So please send your questions.

Jessie: You can leave it in the comments.

Jess: We've got a form on our website.

Jessie: So many ways to get a hold of us on all of our social medias.

Jess: Yeah, it's just the two of us, and we check everything all the time.

Jessie: Thank you again for the wonderful reviews.

Jess: I literally cry.

Jessie: I actually..