Think you don’t have enough money to start investing? Think again. Anyone can learn to begin investing, even if you start your journey with just $100. But when you do start investing, the most important part of the process is to have some basic knowledge.
Investing is when you buy something in hopes that it will appreciate (increase in value) or generate income. People can invest in many ways, from buying gold or real estate to putting money toward building businesses and furthering their education.
In the financial world, investing most often refers to buying an asset, such as individual stocks and bonds, mutual funds, or exchange-traded funds (ETFs), that you expect will help you grow your money over time.
Investing is not the same thing as saving money. Saving money is an important place to start building a better financial future. Investing regularly is one of the best habits you can build for financial success. By investing, you are able to grow your money over time.
No one else knows what investment process is right for you. You need to think about how old you are, how long you will work until you retire, and what your risk tolerance is.
Most importantly, don’t wait to invest. Although it is essential to educate yourself before investing, you should not wait too long to get started. When investing, you want to have the value of time. The sooner you start to invest, the more time your investments will have to grow. That extra time could lead to significant growth due to the power of compounding (more on that later).
Planting a Seed
When you decide to invest your money, you are putting it into a vehicle with the goal of receiving a return down the line, hoping that the amount you put in will grow. In most cases, you plan for little involvement on your part once the money is invested.
One of the easiest ways to begin investing is through an employer. Many employers offer a 401(k) or 403(b). These are retirement savings accounts that allow you to save money for retirement on a pre-tax basis. Employers often offer matching funds, which means they will match a certain percentage of your contributions. (Not taking advantage of the matching percentage from the employer is essentially leaving free money on the table. This is especially an issue for women, who face a gender gap in retirement.)
When you choose to invest your money, you should assume that you might lose some value along the way, because the market will rise and fall. The stock market consistently moves up and down depending on a number of factors, so it’s never a good idea to try to “time the market.” But don’t worry about the market’s ups and downs or negative headlines regarding the economy in the short term, because your biggest asset when investing long-term is time (more on this later).
Return on Investment
There are three ways an investor earns an investment return: interest, dividends, and capital gains.
Bank savings accounts, certificates of deposit (CDs), and bonds generate interest. Investors often choose these investments when they want to know exactly how much they are going to earn on a regular basis.
Stocks, mutual funds, and ETFs generate dividends. Dividends are attractive to investors because they are a form of current income. However, dividends are not guaranteed; in return for assuming that risk, investors hope to be rewarded with higher dividends and the expectation that the underlying investment will appreciate in price over time.
Investors who want their investment to grow in value choose investments such as stocks and funds that offer capital appreciation. Capital appreciation is a rise in an investment’s market price resulting from the difference between the purchase price and the selling price of an investment. Investments designed for capital appreciation include real estate, mutual funds, exchange-traded funds (ETFs), stocks, and commodities. To benefit from an investment that has increased in value, an investor must realize the gain by selling the investment for more than the purchase price.
Investment Types
- Stocks are likely what first comes to mind when youthink of investing. Stocks represent partial ownership of a company, and they may appreciate in value as companies become more successful or desirable. They also may generate income through dividends, or regular payouts of profits that some companies pay to shareholders.
- A bond is essentially a loan from an investor to a borrower (a.k.a. issuer of the bond). Issuers may be anyone from federal and local governments to private companies. Investors generally expect to receive full repayment of the loan—plus interest—by the time the loan (i.e., the bond) is due.
- Bonds are typically a less risky investment than stocks but often have lower returns. Both risk and return depend in part on the issuer’s creditworthiness. The most trustworthy issuers, such as the U.S. federal government, may offer more modest interest rates because they are unlikely to fail to repay what they borrow. Certain companies may have to offer higher interest rates to entice investors if they have a higher chance of defaulting on repayment. There are also bonds with lower interest rates that can offer tax advantages, such as municipal bonds or Treasury bonds. Additionally, bond rates can be impacted by other factors, such as current and expected future interest rates, and even inflation.
- Investment funds are professionally managed pools of money or assets earmarked for a specific investment goal or objective and risk level, such as matching the performance of the S&P 500 index. But, as the ubiquitous disclaimer says, past performance is no guarantee of future results.
Because they contain many components, funds spread money across many different investments, helping to shield investors from taking a big hit if a single investment slumps. The most common types of investment funds are mutual funds and ETFs. Investment funds typically contain stocks, bonds, money markets, or a mix of the three.
Compounding and Diversification
“It’s not timing the market. It’s time in the market.”
You might have heard this popular saying, which makes a wise observation: time fuels the potential power of compounding.
Compound interest means a savings or investment account earns interest of its own. In other words, you earn interest on both your initial balance—called “the principal”—plus the interest that’s added to the balance over time. Investors who receive dividends and/or capital gains can also benefit from compounding. For example, an investor who receives a dividend payment from or realizes a capital gain on an investment may also benefit from compounding.
Diversification is the process of spreading your investments across asset classes. In doing so, you’re attempting to offset any potential losses by investing in assets ranging from low to high risk.
The goal of diversification is not necessarily to boost performance—it won’t ensure gains or guarantee against losses. Diversification does, however, have the potential to improve returns for whatever level of risk you’re aiming to take on. You want your investments spread out in many sectors of the market; if you don’t invest by not investing in many different types of assets, you are more likely to experience investment volatility and risk.
In other words, diversification helps to mitigate risk.
Conclusion: Start Investing Now
There’s a general consensus that investing can help you achieve your financial goals, which gives you a leg up.
The key? Start early. That way, your money will have the time it needs to generate higher returns. At the same time, also identify your financial goals so that you can tailor your investment portfolio accordingly.
Regardless of the amount you’re investing, putting your money in a position where it has growth potential may not only increase your wealth, but also help establish financial habits that can benefit you throughout your life. Investing even small amounts frequently can really add up over time.
Working with a financial adviser, someone who does this every day and understands the market, can aid you in making the right decisions for your investments. Don’t be afraid to ask for help. Think of it as adding someone to your team. At the very least, if you’re not working with a financial adviser, you should review your portfolio annually.
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Disclaimer
While this article may concern an area of investing or investment strategy in which we supply advice to clients, this document is not intended to constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we and/or our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All expressions of opinion reflect the judgement of the author on the date of publication and are subject to change.
Past performance should not be taken as an indicator or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. As with any investment strategy or portion thereof, there is potential for profit as well as the possibility of loss. The price, value of and income from investments mentioned in this report (if any) can fall as well as rise. To the extent that any financial projections are contained herein, such projections are dependent on the occurrence of future events, which cannot be predicted or assumed; therefore, the actual results achieved during the projection period, if applicable, may vary materially from the projections.