Most adults are well aware of the fact that they should be investing, and that they should start as early as possible in order to save for retirement. Unfortunately, the learning curve for investing is pretty steep and the prospect can be intimidating for newbies (and even seasoned investors).
In short, most people don’t have the faintest idea how to get started when it comes to investing. How much money should you sock away each month? Which types of investments should you choose? Do you even know what types of investments are available to you?
Although getting started with an investment strategy can be overwhelming, you shouldn’t let the complexities of this process derail you, especially if you’re interested in making your money work for you. With some basic knowledge under your belt, you should be able to hit the ground running. Here are a few things everyone should know about investing.
What is Investing?
The concept of investing is actually pretty simple. If you have a savings account, you’re already investing, whether you know it or not. Investing is, in the most basic sense, the act of committing funds to an investment account for a set amount of time with the expectation that you will see a percentage of return.
When you put money into your savings account, it won’t earn much interest – generally less than 1% annually these days. Still, at the end of the year you will have more money than when you started and all you had to do was place your funds in the account and let them sit.
This is the easiest and safest form of investing, but it is not the most lucrative by a long shot. This brings up a good point, though. When investing, there is always potential to make money, but you have to assess the risks associated with different investments.
Often, there is a risk of losing money when you invest, and the more you stand to gain, the greater the risks usually are. You need to balance risks and potential rewards any time you invest your money so that you don’t stand to lose more than you can afford to.
Many people equate investing to gambling, but this is hardly the case. Some people do treat the process like gambling, selecting risky investments without first researching their options. However, when you behave responsibly, comparison shop for investment opportunities, and analyze the potential risks and rewards in order to make an informed decision, you can mitigate risk factors and invest your money wisely.
What is Compound Interest?
Interest is easy enough to understand. When you invest $1,000.00 in a CD (certificate of deposit) and earn 2% interest over the course of a year, the end result will be $1,020.00. Compound interest is a little more complicated, but a lot more appealing when it comes to investing.
Compound interest allows you to earn interest not only on your principle investment, but also on the reinvested interest earnings. Suppose you put money into an investment account that’s earning 5% interest annually, just for example.
If you start with $1,000.00, you’ll earn $50.00 in interest and have $1,050.00 at the end of the year. If you reinvest that $50.00 you earn in interest, however, the next year you’ll earn $52.50. The year after that you’ll add $55.13. This is assuming you add no additional principle to the account.
The point is that your money will start to increase exponentially, earning you more and more as it grows, whether you add more principle or not. As you can see, compound interest accounts are the very best way to make your money work for you with very little effort on your part. The only caveat is that you can’t touch the money – time is the key component in making a compound interest strategy pay off.
Types of Investments
There is no shortage of investment opportunities to consider. When you hear the word “investment” you might think of a portfolio of stocks and bonds. However, as already discussed, even a simple savings account is a form of investing.
You can also invest in real estate, for example. Some people invest in collectibles like comic books or movie or sports memorabilia. Or you could place money in retirement accounts like a 401K, Roth IRA, or index universal life policy (IUL).
Before you get into particulars you should know that there are a few broad categories of investments. The first is investments that you own, and this includes tangible assets like real estate, art, or jewelry, just for example. If you own a business, it could also fall under this category, and stocks confer partial ownership of a publicly traded company.
Assets are further broken down into asset classes for the purpose of investing, so speak with your stockbroker or financial advisor to find out more before you decide where to put your money.
Another category of investment is loans, whereby you loan your money to the government, a bank, or other entities and basically earn interest in the process. When you buy a government bond, for example, you’re giving the government a loan with a set term after which it must be repaid with interest. The same is virtually true of CDs, whereby a bank holds (and uses) your money for a set amount of time and then returns it to you with interest.
There are also cash equivalents, which are short-term investments considered to be “as good as cash”, such as treasury bills, commercial paper, and marketable securities. Or you could become a venture capitalist, loaning money to small business startups that show growth potential.
Once you start delving into investing, you’ll find that there is a whole world of investment opportunities available to you. Until you understand the many types of investments, though, it’s probably best to start small with minimal investments and low risk options.
Ways to Invest
There are really only two ways to invest. You can either do it yourself or hire professionals to help you make decisions and manage your accounts. These days, plenty of people think they can go it alone with platforms like E-Trade, but this is a risky venture since the average adult knows relatively little about investing.
If you hire professional help, however, you have a much better opportunity to succeed. Should you hire a financial advisor? A stockbroker? Who can offer the best advice? In truth, you may want to look into a variety of options before you start investing.
- Brokerage accounts. This traditional investing arrangement involves working with a brokerage firm, and often with a specific stockbroker, to create and manage an investment portfolio. Under this arrangement you would deposit funds with the firm and allow the company to complete transactions (i.e. trades) on your behalf. Many people choose this option because of the expert advice and the convenience associated with collaborating with an experienced broker. Popular brokerage accounts include Charles Schwab, Fidelity and E*TRADE.
- Robo-Advisors. Many brokers simply use algorithms designed to identify the best places to invest your money. You can cut out the middle man and save some money in the process by selecting a robo-advisor. These online investment firms limit human intervention and recommend opportunities based purely on the numbers.
The robo-advisor field is blossoming these days with niche markets available based on your investment goals and strategies. If you have a low risk tolerance and prefer a conservative approach, especially where your retirement savings, is concerned, you may want to consider Betterment accounts. Betterment accounts offer diversified (yet conservative) stock and bond portfolios, automatic reinvestment, and straightforward pricing, among other benefits, allowing investors a simple way to manage their own investments.
If, however, you have a passion for a certain industry then you may want to consider a robo-advisor firm like Motif. Motif also uses computer algorithms to automate the investment process, but what sets them apart is that they provide investors with customizable portfolios all aligned under a common theme, or motif. These motifs fall into one of six overarching categories: asset allocation, global opportunities, income strategies, sectors, trading strategies, and values-based. Investors can use pre-set motifs or modify them to reflect their own interests.
There are so many reasons to invest, but the main one is to plan for a stable financial future. With costs increasing, social security on the decline, and people enjoying longer lifespans, it is now more important than ever to ensure that you have enough money set aside to live comfortably after the age of retirement, and possibly leave something behind for loved ones.