Behind every decision that we make for our future, there is some kind of investment involved. Whether it’s buying a house that’s in an area with a good school for your existing or growing family, or buying a house in an area that we think will increase in value over time. Consider also trying to attend the best university in order to increase your chances of finding a quality job easier and settling into a career post-graduation. In any situation when we are making decisions that will affect us later in the future, we are essentially making an investment, whether willingly or unknowingly. Financial investing carries the same principle but is definitely more deliberate. If you would have asked me 10-20 years ago what investing is, I would have imagined having a chunk of money and opening a business! Which is not totally wrong but let’s take a look at the real investing is.
First, understand what investing means. In simple non-jargon terms, it means letting your money working for you. More technically it means using assets to generate income or profit overtime. When investing, you want to make sure you have a goal in mind. Do you know why you want to invest? When you can understand this, it’ll be easier for you to make decisions about managing present desires in order to achieve the financial future you seek; giving up something we want now to achieve future goals. This is important to understand because true investing is a long-term strategy, not a get rich scheme that has return overnight.
You might be thinking now, how do I start, what do I need to know, and what is the first step? Let’s break it down into 3 steps: the type of investment vehicles, the type of accounts, and the types of investment strategies.
When we hear the term investing, most of the time it means putting money into stocks and bonds, and sometimes, (fewer cases REIT’s), real estate type of investments, and commodities. Most of the time, if not all the time, it will be stocks that are shares in the ownership of a company. Consider yourself as a small owner of that company for which you own the stock. With bonds, you the investor are the lender/ issuer and corporate or government are the borrower. So, some investment vehicles would be ETF (exchange-traded fund) or Mutual funds. Both of them are based on stocks and bonds.
As far as accounts, there are taxable and non-taxable accounts. Non-taxable accounts, such as 401(k), 403(b), IRAs, SEP…etc., are for your future retirement. A 529 account is also non-taxable but it is for your future education. Taxable accounts are easy to set up through different brokerage houses. It depends on the situation of every person, but a type of account that everyone can have is a taxable investment account. IRAs are for anyone that has earned income. Other types are employer-sponsored plans like solo 401K, SEP IRA, etc. Another option can be a brokerage account where you can buy ETF, index funds, single stocks, etc.
When it comes to investment strategies, the most important thing to do is to set up goals and stick to them. When you are resolute in your goals, you are more likely to keep your emotions at bay and avoid making financial decisions based on fear and uncertainty. You’ll also want to diversify your investments. This does not mean to pick and choose stocks, as that is not investing, but rather be mindful of the investment vehicle mix, stock vs bond. To take the guesswork out, aim for investing in an ETF and or index funds. Try to keep your fees as low as possible and practice dollar-cost averaging, meaning buy into the market during regular intervals to offset the impact market volatility. Remember stock picking and chasing performance is not investing. It is ok if you want to put a small portion of your savings, like 5-10%, into single stocks of some companies that you really believe in, but keep in mind to consider that portfolio as play or fun money, call it mad money. Investing is having goals and strategies and sticking with them.
One other point to take away is that it is important is to start investing sooner rather than late. Start as early and as young as you can. The power of compounding interest will be on your side when you start early and stay invested for a long time. Couple these principals with continue to increase your financial education and you will be a capable investor in no time. You don’t have to be a market genius or analyst to start. You can start on your own or ask for professional help. We’re here if you ever need assistance.
For more information, visit our Eventbrite Page to see when we are hosting an Intro to Investing or Investing 101 webinar for a deeper dive into the topic.
Lead Advisor, InvestEd.