If you do not invest your money, you risk losing purchasing power every year. This is because of the rate of inflation, which sits at around 2 percent a year in the United States, will slowly make money sitting in a bank account devalue.
Investing lets your money grow itself. As long as you outpace inflation, you can slowly become richer. However, there are a ton of different investment vehicles that you can choose from, which can make starting your investment journey difficult.
Understanding some general investment tips, and different types of potential investments can make it easier for you to get started.
Investment Tips and Strategies
Having an idea of what type of investment you’ll put your money into is only half the battle. You also need to have a general idea of how to invest your money, the timeline you’re looking at, and the amount of risk that you’re comfortable with.
Choose a Platform
The first thing that you need to figure out is how you’re going to invest. Sites like Robin Hood offer low or no-fee trading, which you can set up in a matter of minutes, but are completely self-directed. Going through your bank or a financial advisor gives you access to professional advice, though will come with higher fees.
Figure Out Your Acceptable Risk Level and Timeline
Which investing platform and vehicle you choose are going to be determined by why you’re investing. If you want to save money over the long term, for a goal like retirement or college, then you probably want a low-risk option. Things like bonds, ETFs, and a few very stable stocks are a good choice in this case.
If you’ve got the financial capital to take some losses, and want more potential to earn money, you can afford riskier investments. You should still spread your money around to protect yourself, but you can buy newer stocks during their initial public offering (IPO). Venture capital investments, which happen when a company is still a startup and trying to get itself off the ground, are also high-risk/high-reward investments.
This is probably the only piece of investing advice that is anywhere near as common as “buy low, sell high.” Its cliché nature isn’t without merit though.
Diversification can take two forms. You can either buy a mixture of investments, like mixing stocks, bonds, and gold, to protect against shocks in any market. You can also mix different sectors, like buying only stocks but spreading them out across healthcare, mining, financial services, manufacturing and so on.
Common Types of Investments: Where to Start
No matter what platform you choose, there are going to be tons of different investments available to you. While it may seem daunting at first, there are four main investments that you should be aware of. The following are just four of the most common types of investments that you can choose from and are a good place to start out.
Stocks are the simplest and most well-known type of investment for beginners. They act as a share of ownership in a publicly-traded company. As people buy and sell these shares, their value will fluctuate.
Profitable and well-established companies may pay out dividends every month or every quarter, which are a share of their profits. Newer companies will likely put that money back into the business.
Bonds are traditionally a safer investment than stocks. They are in effect a loan, either issued by a government or a company. Government-issued loans are extremely secure, while private bonds carry a little more risk, as if the company goes bankrupt you lose your interest.
Bonds range in length and payout, but you know exactly how much you’re going to make when you first invest in a bond. This helps provide a stable return for more risk-averse investors.
Exchange Traded Funds, or ETFs, are essentially bundles of stocks together. ETFs vary in size, but some can contain hundreds of different stocks. They track a specific industry or type of business – like real estate stocks – and you can buy them just like you would with stocks.
ETFs also offer dividends, in some cases. They are a great way to get a diversified portfolio of stocks without having to research many individual companies and investments on your own.
An alternative investment platform is a type of investment that isn’t neatly categorized like the above types of investments. Private investments, hedge funds, and even things like art and commodities are all examples of alternative investments.
Alternative investments range in size and risk. However, they are a good way to invest in something that isn’t as widely traded as stocks are. Hedge funds and private equity, in particular, tend to be less volatile than their publicly traded counterparts.
While this all sounds well and good, alternative investments are not necessarily for everyone. Private equity and hedge funds commonly have barriers to entry, such as minimum investment amounts in the six or seven-figure range.
Always Do Your Research
Investing isn’t something that you should treat casually. Your money can work for you and grow itself, but only if you put the time into looking into investment tips and strategies so that you can invest intelligently. Never invest more than you can afford to lose, and be sure to hedge against risks by diversifying or cutting your losses when you have to.
For more information about investing, you can check out the finances and money-saving sections of our blog.