The Basics of Investing

The Basics of Investing

November 26, 2019
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The Basics of Investing

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Do you let your money sit in a savings account? You probably think you’re playing it safe, but in reality, you’re throwing money out the window. Investing makes your money work for you by earning interest and dividends just for choosing the right investment.

If you’ve never invested before, it can be scary. With the right steps, though, even a beginner can start making money in short and long-term investments. It doesn’t take thousands of dollars to start investing. Oftentimes you can invest with as little as $5.

What is Investing?

When you invest your money, you buy assets that will grow in value. The growth becomes your profit. You can invest in ‘real’ things like real estate or you can invest in ‘intangible’ assets, such as stocks, bonds, mutual funds, and exchange-traded funds.

Different Types of Investments

We’ve touched on the different type of investments above, but here’s a more detailed approach.

Mutual funds

A professional manager pools money from multiple investors (including you) and buys securities. You get the advantage of diversification with one transaction and only one trade commission. Mutual funds often pay dividends, which are distributed back to investors, and the value of the shares of the fund you purchase change in value based on how the securities that comprise the fun change in value.

Bonds

When you buy a share of a bond, you are in essence lending your money to new companies or the government and given a return in the form of interest. T-Bonds, which are government bonds, have virtually no risk, but also have a low rate of return. Many bonds offer a fixed rate of return, if you keep the bond until maturity.

Stocks

When you buy stocks, you buy shares in a company. When the company does well, they may pay dividends to stockholders. Stocks can also increase if a company does well, and if you sell a stock you purchased when the value is higher than the price you paid for it, you’ve earned a profit.

Real estate

You can invest directly in real estate, buying a property and renting it out, but that takes a lot of time and hassle. You can also invest in real estate funds, such as those offered by FundRise or a Real Estate ETF that pool money together to invest in many real estate projects at once, similar to a mutual fund. You get the benefit of diversification and you don’t have to worry about the hard work of taking care of the real estate yourself. These investments will normally pay dividends based on the profits of operating the real estate investments held by the fund, and the value of the shares you own can change in value as the real estate value changes.

How to Start Investing

When you are ready to invest, you’ll need to decide where to invest your money using the following steps:

Choose your approach

Will you manage your own investments, invest with a roboadvisor, or use a discount broker? We suggest starting small. Either manage your own investments or use a roboadvisor, just watch the fees. A roboadvisor, such as Betterment or WealthSimple, is a service that algorithmically allocates your investment funds for you based on the information you provide. A discount broker is a human advisor that handles your investments for you, usually for a commission.

Open your account

After choosing your approach, open your account and fund it. If you choose to invest in retirement through your employer, set up your 401K. Also, find out the maximum amount your employer will match. At the very least, set yourself up to contribute that amount annually. If you are setting up your own account, fund it. You don’t need hundreds or thousands of dollars. Start with what you can afford. If you want to invest some of your savings account, you might consider opening a brokerage account.

Make changes

As you get more comfortable with investing, take more risks. Dabble in stocks and mutual funds. Put more money in your 401K or if you max out those contributions, invest in an IRA.

Goal Setting – Risk vs Reward

When you invest, you have to measure the risk and the reward. As a beginner, you don’t want to set your sights so high that you take the largest risk. It’s easy to imagine the large rewards, but remember that large risks come with the risk of large losses. Balance your desire for reward with middle-of-the road risks or by diversifying your investments.

Diversification – What’s the Big Deal?

One of the most effective investment strategies you can have is to diversify your investments. In other words, don’t put all of your money into one investment, whether it is a specific company, or type of investment. What happens when that investment tanks? You could lose everything. If instead, you invested in multiple investments, if a few underperformed, the others may offset the loss with a gain.

If you invest in mutual funds or ETFs, the diversification is done for you, as these types of investments are comprised of many individual investments. The same is true of roboadvisors. They choose a variety of investments in different industries and with different risks. They balance the high-risk investment with fixed-income investments so that you know you’ll receive some rate of return, even if it’s small.

Hands-on Options vs Hands-Off Options

As you choose your investments, think about the level of involvement you want. Do you want to be hands-on where you make active decisions and manage the investments? When you invest in real property or real companies, you are hands-on. Your decisions and actions affect your earnings.

If you want something more hands-off, consider investing in mutual funds, target funds, or ETFs. The only decision you have to make is how aggressively you want to invest and how much. The investments handle the rest themselves.

Maintaining and Adjusting Your Investments Over Time

Whether you choose a hands-on or hands-off approach, you’ll need to maintain and adjust your investments over time. As your income, family status, and financial needs change, you’ll want to change your approach accordingly.

For example, when you are young and single, you can afford to be a little more aggressive with your investments, as it’s more likely that any short-term dips will make up for themselves over the long-run. Once you settle down or start nearing retirement age, you want investments that provide more steady returns without the change of dramatic short-term changes.

Explore Your Options

Investing your money doesn’t have to be scary. Even if you just start with a few dollars, start somewhere. Every cent you earn compounds and the earlier you start investing, the more time you have for your money to grow. Explore your options, play with different investments, and see where you feel comfortable investing your money now and well into the future.

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