Finance Globe

U.S. financial and economic topics from several finance writers.
8 minutes reading time (1536 words)

The Beginner's Guide to Investing

How do you think the majority of wealthy Americans became financially secure? Did their parents leave them an inheritance? Did they win the lottery? Did they invent something the whole world needed? No, they developed a sound financial plan and invested their hard-earned money wisely.

Saving is for short-term needs
Simply putting your money into a bank savings account or CDs will allow you to save money for an emergency fund, a big family vacation, a down payment for a house you plan to buy in a few years, and other near-future needs.

With today's interest rate, you're lucky if the earnings even keep up with inflation. You’ll sacrifice potential gains to maintain liquidity, but you can’t afford to risk that your money won’t be immediately available due to market fluctuations.

For needs you plan on paying for in less than five years time, saving money with a federally insured bank or credit union is the safest bet. But not only do you have those short-term goals, you have goals that won’t be reached for many years.

Invest for long-term goals
For these long-term goals, you must invest your money. You could work and save all your life, but the return on your savings will never amount to the rewards you’d gain if you invest and put your money to work for you.

You could plan to build a dream home someday, you might have young children that you plan on sending to college, and you probably hope that you can retire and stop working one day. If these long-term goals are far away in the future, you have time to ride out the ups and downs of the stock market.

Take a risk to reap the rewards
Historically, the stock market has outperformed every other type of investment over the long term. Investment returns of ten to twelve percent annually are reasonable and attainable expectations; some years better, some not so great, but the overall average is what you should be looking at.

The higher returns are your reward for taking a risk with your money; if it were a sure thing it wouldn’t pay as well. Every investor should assess his or her own comfort level with risk; some people are born gamblers and might be comfortable with high-risk investments to get that big payoff, and some people would lose sleep at night every time the stock market took a dip.

The riskier investments have the potential for bigger gains and bigger losses, and the safer investments will fluctuate less and grow at a more predictable rate.

Time is your best friend
The more time you have to invest, the more time you have to make up losses, so financial experts recommend that you invest more aggressively if your financial goal is many years down the road.

Investing more aggressively will more likely pay better in the long run, but if you are so afraid of loss that you’re not comfortable taking a chance, you should do what’s right for you; it’s better to invest more conservatively and be comfortable than to be afraid to invest at all.

Your financial goals might not be so far away; if you’re nearing retirement or you’ll be paying for your kids to go to college soon, you probably want the majority of your money in more conservative investments. How much time you have to recover from market ups and downs is a major factor in how aggressively or conservatively you should invest.

Asset allocation is important
Reduce the risk involved by spreading your money around in different types of investments. By spreading around your investments, you balance out the extremes and can still earn a good return on your money. One investment may soar while another nosedives, and some of your investments will gain at the typical rate; it will still average out to be better than simply taking the safe, low-return route with a savings account.

Keep some cash in bank accounts or CDs for short term and emergency needs, and money you want to grow for the long term invested in stocks, bonds, and mutual funds. The amount you have in each type of investment depends on how aggressively you want to invest.

Stocks and bonds
When you buy company stock, you are buying a share of ownership in the company, and you will share in the profits and losses of that company. Companies sell shares of stock to provide themselves with income for improvement or expansion. A lot of money can be made in the right stock, and a lot of money can be lost in the wrong stock. The risk is higher than other types of investments and thorough research is important before investing.

When you purchase a bond, you are basically giving a loan to the issuing entity. Corporations and government entities borrow money from the investor by selling bonds to raise money for operations or expansion. Bonds issued by the federal government are extremely safe, bonds issued by cities and states aren’t guaranteed but the risk of default is normally pretty low, and some bonds issued by corporations are pretty safe and some are very risky.

Mutual funds
Mutual funds are a way for investors to pool their money to invest in a variety of stocks and bonds. Some mutual funds invest in stocks, bonds, and cash equivalents, giving you a diversified portfolio by investing in just the one fund.

Some mutual funds focus on companies in particular sectors, such as health care or technology, and some mutual funds invest in companies in a broad range of sectors. Some mutual funds even invest in other mutual funds. Mutual funds are considered less risky than individual stocks, and the automatic diversity make them an ideal starting point for new investors.

Begin investing as soon as possible
It’s often recommended that you get all your credit card debt knocked down to an amount you can pay off every month before you start; there’s little financial benefit to invest to make ten percent if you are paying twenty percent in credit card interest fees. However, if you know that you will always have credit card debt because you just can’t keep from shopping when you have a zero credit card balance, you might be better off investing anyway.

It would be worse if you never start investing because you always have other debt. You can still watch your investments grow over the long term and know that your future will be secure even if you spend a little more than you should now.

Don’t try to time the market
It’s a good idea to budget in a set amount every month, and invest that amount religiously, no matter what the market is doing. Don't try to wait until stock prices go down; even expert money men can’t predict with total accuracy what the market will do next, and they spend a lot of time studying it. The market will continuously fluctuate as it always has. You can save yourself a lot of time and stress by leaving the market watching to the professionals.

Research your particular investment carefully before you invest, and check up on it monthly, but don’t try to delay investing until it’s the “right time.” The longer you spend being out of the game, the longer it will take for you to amass your fortune.

You can find the money to invest
Most of us never have “extra” money to invest; that money is usually spent before we even think about our future. If you don’t have thousands of dollars lying around, how do you come up with the funds to invest?

A great way to invest regularly is to have an automatic withdrawal taken from your checking account every month to go to your investment; you can start with as little as fifty dollars a month. By doing this, you will never forget to invest, and you will force yourself to budget for it like it’s any other bill.

Also, you’ll benefit from dollar cost averaging. If you invest a set amount every month, you will automatically purchase more shares when the prices are low and fewer shares when the prices are high. Your overall cost per share will be lower. Automatic investments are a great way for someone who doesn’t want to spend time and stress on their investments; you can set it up and go on with your life without a lot of hassle.

Maximize your return
It’s only natural for investors to get scared when the market takes a dip. Many of them make the mistake of selling their investment when its fluctuation is only following the rest of the market. Then they chase the next hot investment when those share prices are up, compounding their mistake. If your investment is a sound one and only following the economy, eventually it will come back up.

Remember, your aim is to buy low and sell high, just the opposite of what many panicked investors do. If you have the discipline and the stomach for it, you can take advantage of low share prices by buying even more than you normally do, increasing your potential profits in the future.
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Friday, 19 July 2019

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