Master Your Investing
Today you’ll learn the basics of investing. You don’t want to invest money that you’re planning to use within the next few years, but if you’re saving for retirement or another long-term goal, you can consider investing.
Investing is a way to build wealth over time. You buy stocks, bonds, or index funds and let the money sit for the long term. Investing earns a larger return when compared to a savings account or CDs, since returns on investments tend to be much higher than interest rates. However, you must understand your personal risk tolerance as well as a few terms and concepts to be prepared to invest your money.
First, you should determine your level of risk. This usually depends on your age and how long it will be until you want to use the money you are investing. If you are younger and have a long time before you want to use the money, you can take on more risk and will most likely invest in more stocks. If you are older and have less time before you want to use the money, you don’t want to take on as much risk and will most likely invest in more bonds. Bonds tend to have a lower return on investment, but they are a safer investment than stocks, which means you’re less likely to lose your money.
Second, it is important to diversify your investments. You wouldn’t want to keep all your money in cash under your mattress; instead, you’d spread it out over a checking account, a savings account, a retirement account, your home equity, and personal investments. In the same sense, you don’t want to invest all your money in a single stock or bond. You’ll want to diversify across many different industries and many different stocks. It is easy to do this by investing in mutual funds or exchange-traded funds (ETFs). These two types of funds are bundles of different stocks and/or bonds. As an investor, you buy into a fund and the diversification is taken care of for you.
A third important concept to understand is fees. When making investments, whether in a mutual fund or ETF or a single stock or bond, there will be fees associated with either your account or the specific investment or both. So, be sure to check the fees that are charged by the company that holds your account and your investments. These fees can add up significantly over time and reduce your returns. One key for simple investing is to look for low-cost index funds. These are diversified portfolios of stocks that have low fees associated with them. They are a great way to start investing.
One more essential tip for investing is to buy and hold—don’t pay attention to market swings, and don’t panic or get reactive in your investments. Investing is a long-term strategy, so put your money in and let it sit. The average investor is never going to be able to beat the market, so the best strategy is to buy and hold. It is important to check in on your investments once or twice a year to see if you might need to rebalance between different funds to get back to your appropriate level of risk. However, you should ignore market fluctuations and let your money work for you.
You can manage your investments quite easily on your own; however, if you would like help, you can look for a certified financial planner. It is important to look for a certified financial planner who is also a fiduciary, which means that they must act in the best interest of their clients. Sometimes financial planners have monetary incentives to recommend certain investments to clients even though those investments might not be the best option for the client. If a financial planner is a fiduciary, then they cannot act in that way.
This is just a primer on some basic investing concepts. Before you make any investment decisions, be sure to research any funds, stocks, or bonds that you’re planning to invest in—look at average returns and fees as well as diversification. Tomorrow we’re going to find out how to master your frugal lifestyle!
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