Money isn’t everything, but having enough of it can certainly make life easier and more enjoyable. While your day-to-day job can provide all that you need to live on each month, investing some of your money now can help provide for your future. Think about your kids’ college fees, upgrading your home, or even retirement. Investing might seem complicated at first glance, but it needn’t be once you understand how it works. In this blog, we’re going look at everything you need to get started.
Investing is essentially putting money that you have into something that you hope will grow your money over time. There are many different types of investments which we’ll get into a bit, and each has its own benefits and downsides. Investing is usually a long-term thing, and the steps you take today could benefit you greatly in five, ten, or more years into the future. As you’re just starting out, it’s often best to leverage the investment experience of experts rather than investing on your own. Let’s look at how you can do just that.
If you’ve got enough money, the right time to invest is now. While it’s true that there are specific times that it may be more advantageous to invest – such as when stock prices have fallen – this can be very hard for a beginner, or even a pro, to judge correctly. The longer your money has to grow, the larger it can become.
The most common piece of advice given to new investors is ‘never invest more than you can afford to lose.’ Though risk factors vary widely, you should always keep in mind the possibility that you could lose everything you invested.
Investing is generally not something you do just once, though if you have had a recent windfall and want to grow it, this may be the case. Consider investing 10-20% of your monthly income over the long-term.
There are many ways to invest your money. These are the most common types:
One of the simplest and safest ways to invest, 401(K)s are ‘defined-contribution’ pension accounts, which are offered by many employers. If your employer offers one, then you can sign up to have a set amount deducted from your pay-check each month, and your employer may also match this amount. This money will then be invested according to whatever options you select from those available, and you can withdraw it when you reach retirement. You can withdraw your money early, but penalties apply.
Stocks are literally a share of a particular company. Not all companies offer stocks for sales, only those which are ‘publicly traded. There is a high potential for profit, but there can also be a considerable risk, as prices can go up or down. Generally, the idea is to buy when stock prices are low and then sell them when they are higher for profit.
Rather than one individual purchasing stock in a company, mutual funds collect together the money of lots of investors and use it to buy stock in a variety of companies. Mutual funds can be a good start if you’re not sure what to invest in, and many of them are ‘actively managed’ by an expert investment manager.
An index fund is a special kind of mutual fund which is linked to a stock index, such as the S&P 500. By holding stock that reflects the make-up of the index, they offer a diverse and, therefore, a safer investment portfolio that follows the performance of the market as a whole. They also often incur fewer expenses than managed mutual funds.
Bonds represent a loan that you, the investor, are giving the company or even the Government in return for interest payments. These interest payments will often be made to you on an annual basis, as well as at the set date when the bond ‘matures’ and it’s repaid in full.
In order to invest, you need to do so through a broker, and this is increasingly done online. Fidelity Investments, Charles Schwab and TD Ameritrade are three of the most popular brokerages in America, and these all have online options. You can choose to manage your own investments, or you can opt for a ‘full-service’ option, which will guide you and help manage your investments for a fee, of course. This latter option is highly recommended if you’d rather not spend a lot of time researching and monitoring your own finances.
If you’d like to reduce your costs, you can also use a ‘robo-advisor’ that uses algorithms to manage your investments based on your goals and financial situation.
For beginners, picking a ‘diverse’ investment strategy that includes a wide range of types of investment and company is recommended. That way, if one particular investment performs poorly, your finances as a whole need not suffer. When you’re more experienced, you may choose to focus your investment in one area, if you are confident in your knowledge and its chances of performing well.
It’s essential to be mindful of any fees that you need to pay. These will vary depending on your investment but include advisor charges, expense ratios in the case of mutual funds, and transaction fees for buying or selling stock. Some brokerage accounts also charge annual fees.
There are also a variety of risks you need to be aware of. These include:
Market risk – Stock prices can fall, resulting in your investment being worth less than you paid for it.
Liquidity risk – If you need to sell your investment for financial reasons, you may have to do so at a lower price for a loss.
Default risk – In the case of bonds, there is a slight risk that the company through which you purchased the bond files for bankruptcy. This may result in you not receiving the expected return.
Investing can be a great way to safeguard your future, it can even be enjoyable to watch your money grow. But it’s essential to be aware of the risks and never to invest more than you can afford to lose.