The good news is, understanding a few basic concepts can take you a long way.
What is investing?
Essentially, investing is a long-term strategy to help you grow your wealth and pursue longer-term goals like paying for a down payment on a new house and funding retirement.
At this point, you may be wondering how investing and saving are different, since they both involve putting money away for the future. A savings account gives you easier access to your money, but it’s a lower risk/lower reward option. With investing, you accept more risk in exchange for potentially greater returns over time.
Read more about the difference between saving and investing.
Investing’s key ingredient is compounding, which occurs when you reinvest the investment’s earnings to potentially generate more earnings.
For example, let’s say you invest $10,000 when you’re 25. With a 5 percent return on that investment, compounded annually, you’ll have $70,400 at age 65.
The earlier you start investing, the longer your investments have to generate more earnings, which generally leads to a greater impact. Take a closer look at compounding in action.
Types of investments
There are a lot of options when it comes to investing your money. The most common investment vehicles are stocks, bonds, mutual funds and exchange-traded funds (ETFs).
- Stocks are shares of a company, also known as equity. Essentially, you own a small portion of a company when you buy stock.
- Bonds are small loans given to a corporate or government entity. If you purchase bonds, you’re promised repayment plus a set rate of interest for a specific period of time.
- Mutual funds are a type of investment fund that’s professionally managed. You and other investors contribute to the fund and the fund manager invests in a large group of assets (generally stocks and bonds).
- ETFs are similar to mutual funds, but instead of investing directly into a fund, you buy shares on a public exchange, similar to buying stock.
Get more details on why you’d want these common investment vehicles in your portfolio.
Determine your investment strategy
Rather than just throw money into the market, you may want to consider a cohesive investment strategy. An investment strategy outlines how you diversify your money among various investment vehicles.
Your strategy should be guided by four things:
- Your financial goals. Whether it’s purchasing a new home or sending your kids to college, knowing what you want to achieve can help you make the most of the money you’re investing.
- Your age/timeline. The longer your timeline, the more investment options you have (and the more aggressive you can be).
- Your risk tolerance. Every investment comes with risk. Generally speaking, the greater the risk, the bigger potential reward. Understanding your preferred balance of risk/reward is the foundation for your investment portfolio.
- How you want to invest. Would you like to work with a financial professional, invest on your own, or a combination of the two?
How to start investing
One of the easiest places to start investing is through any employer-sponsored retirement accounts, if you have access to one. Think 401(k)s, IRAs and 403(b) accounts. These plans are comprised of a portfolio of investments. Contributions are directly withdrawn from your paycheck typically with pre-tax dollars, and many employers match contributions, up to a certain amount.
Retirement accounts come with annual contribution limits, so if you’ve maxed out your annual limit or have other goals you want to work toward, you may want to consider one or more of these four common investment instruments:
- Health Savings Account, or HSA
- 529 education plan
- Brokerage accounts, through a licensed broker or using an online, self-directed account
- Online automated investment accounts, also known as robo-advisors
Read more about non-retirement investment options.
Investing can seem intimidating but understanding and following these basic concepts can help you start your journey on the right foot.
Ready to begin? Learn how you can start investing your way today.
Equity securities are subject to stock market fluctuations that occur in response to economic and business development. Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually great for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investing in mutual funds involves risk and principal loss is possible. Certain funds involve special risks, such as those related to investments in small and mid-capitalization stocks, foreign, debt and high-yield securities and funds that focus their investments in a particular industry. Exchange-traded funds (ETFs) are baskets of securities that are traded on an exchange like individual stocks at negotiated prices and are not individually redeemable. ETFs are designed to generally track a market index and shares may trade at a premium or a discount to the net asset value of the underlying securities.