Investments are the secret to growing your wealth. But if you’re unfamiliar with investing, it can be overwhelming. Fortunately, The Motley Fool has a few tips to help you put your money to work as you start your journey as an investor.
But before you deposit your money into an investment account, you need to understand the essentials. These are the most common (and effective) strategies to invest your hard-earned cash:
- Stocks: These are shares of a company. When you purchase a stock, you are investing in that business. When the company does well, you receive a cut of the profits.
- Bonds: When you buy a bond, you lend money to a company or government for a certain period of time. When that date is reached, the entity returns your money with interest.
- Index funds: These are a popular way to invest. Index funds monitor market indexes and balance your investment portfolio.
- ETFs: You can buy and sell exchange-traded funds similarly to stocks.
Of course, investment strategies vary broadly. There is no “best” way to invest, except using the best method for you. Below are a few things to consider to help you find the best way to invest your money.
There are two main types of investing: active and passive. Both have advantages and disadvantages, but there’s nothing intrinsically wrong about choosing either. The key is to focus on growing your wealth over the long-term rather than seeking immediate returns. The strategy you choose primarily depends on your lifestyle, budget, risk tolerance, and preferences.
Active Investing: High Risk, High Reward
Active investors must thoroughly research different investments to build and maintain a viable portfolio by themselves. According to The Motley Fool experts, active investing requires a lot of time, knowledge, and desire. If you plan on using an online broker to trade stocks, that is a form of active investing.
Passive Investing: Lower Risk, Lower Reward
Passive investing is less intensive than active investing. You can compare this strategy to autopilot. Over time, you will enjoy good yields for much less work. When you become a passive investor, you deposit your money in your preferred vehicle and let an expert take care of everything else.
If you want to be a little more hands-on but prefer the ease of passive investing, working with a financial or robo-advisor to build and carry out an investment plan for you is one way to enjoy the best of both worlds.
One of the biggest misconceptions about investing is that it takes a substantial amount of money to begin. However, this is anything but true. Depending on your investment vehicle and platform you use, you can invest for as little as $100, $50, $25, or even $10. It doesn’t matter how much you begin with — the important thing is ensuring you are financially prepared to invest and that you continuously invest for the long-term.
Before you invest, there are a few housekeeping things you must address.
Build An Emergency Fund
Don’t invest until you have an emergency fund first. An emergency fund has high liquidity, making it easy to withdraw cash when you need it. On the other hand, investments of any kind are less liquid and come with some risk. The last thing you want is having to sell your assets during a crisis. With an emergency fund, you can cover these unexpected expenses without tapping your investments. Experts recommend saving three to six months’ worth of living expenses.
Eliminate High-Interest Debt
Another task you should take care of before investing is paying off high-interest debt, such as credit cards. Consider this: long-term yields in the stock market typically return 9% to 10% each year. If you invest at this rate while still paying monthly balances at 16%, 18%, or higher, you’re not gaining anything.
Your Risk Tolerance
As we mentioned earlier, all investments come with some degree of risk. However, risk and returns are closely related. You want to find a middle ground between getting the most returns from your investments at a risk level you are okay with.
Even when you look at more general types of investments, like stocks and bonds, there can be significant risk discrepancies. Treasury bonds, for instance, are low-irks investments. That means they also have lower interest rates. Savings accounts pose an even smaller risk but offer a substantially smaller return.
In contrast, high-yield bonds can deliver more earnings but have a higher chance of defaulting. And when you compare top-tier stocks like Amazon or Microsoft against penny stocks, the difference in risk is massive.
New investors should consider robo-advisors to build an investment strategy that aligns with their risk tolerance and goals. Brokerages provide these services and will make and maintain a portfolio to give you the best bang for your buck while minimizing your risk level based on your needs.
- Frankel, Matthew. “How to Start Investing Money for the First Time.” The Motley Fool, The Motley Fool, 8 Oct. 2020, www.fool.com/investing/how-to-invest/.