People invest money for a range of reasons: a secure retirement, wealth building/management, legacy creation, business funding, and future plans for travel, home buying, and education. But Americans aren't engaging in investment saving early enough or with sufficient funds: less than half of us begin planning and putting money aside to invest for retirement in our twenties, a quarter of Americans asked were saving in their thirties, and about 15% were saving towards investing while in their forties.
While it's never too late to start investing, and no amount of money is too small, starting early and staying consistent is key to a sound investment strategy. But where do you start the process when you don't know a bear from a bull market, what's your risk tolerance or if capitalization is an investment term or something you learned in grade school writing class?
Informed Investing: nine ways to put your money to work
1. There is no good or bad time to start
The best time now, no matter what else is going on in the world. You may spend more to buy the stocks that interest you, and there is no guarantee of a return on the money. Investing is an ultra-marathon, not a sprint to the goal of financial security. Don't be frightened off by friends' stories or media headlines of dire market predictions, nor lulled into investing in too-good-to-be-true schemes. You're looking for a balance between risk and reward, not a quick fix.
2. How much to save: think percentage, not pennies
When you're ready to set aside money for investing, look at the amount as a percentage of what you earn, not a dollar amount. Using a percent figure means you'll keep up with your increased earning potential over the coming years. Using a dollar amount translates to stagnant investing and the cost of future living will outpace the current money you invest.
3. It's not about how much money you start with
Starting with $1,000 as your investment fund is no different from starting with $10,000, or $100,000. How you allot the money and the number of companies, funds, and products you choose to invest in will be different, but how you choose them is the same. You want discounts and bargains in stocks, a steady and reliable return on funds, and al long-term strategy that meets your needs and goals.
4. Decide your ultimate investment destinations
What are your investment goals? It is an early retirement while working part-time or a comfortable and fully leisurely one? Do you have children to send to college, a wish to leave a legacy to a nonprofit, or the desire to start your own business? The amount you save and where and how you invest is determined by these financial directives. Set down your goals on paper: buying a home in five years or saving enough to see you through retirement without worry about healthcare costs. It's easier to save for the tangible goals and determine the saving timeline.
5. Determine your personal fear factor
You're not going into this with anyone's money except your own. How much risk tolerance you have depends on where you invest, how much, and the time you have before you need the money for expenses. Your risk tolerance generally decreases with age, because the need for cash on hand increases with the need to pay for medical care and other expenses as your ability and desire to work full-time decreases.
6. Learn the terms, ask for help
Investment terminology is confusing; knowing the basics is a good start. Learn about different investments, such as stocks, bonds, mutual funds, options, annuities, money market funds, and certificates of deposit. Learn how to select stocks and the terms associated with growth, earnings, and losses. Know the potential risks, rewards, and different levels of investing. There are many online sources of information, including books and podcasts, but your bank, credit union, or a certified financial planner can also provide assistance. Before accepting a professional's advice, ask about their credentials and education; their job is to promote what is best for you, not themselves or their financial institution.
7. Mix it up
The safest way to minimize risk is to diversify: spread your investments between cash, stocks, and bonds to balance potential losses with reasonable gains. Keep your emotions out of your accounts; treat investing as a job, not as a personal relationship. Avoid companies you love with your heart but whose financial performance underwhelms. Understand that the movement of the market is out of your control; researching the companies you choose, knowing their history and financial background increases your long-term chances of recovering during down markets and profiting during better times.
8. Control the cost and keep more of your money
Automate as many of your investments as possible. Invest and trade online, use direct deposit for savings and checking and create an online budget that includes your investment accounts as part of your monthly spending. When you automate, you save time and money for yourself and you don't pay a money manager to do the work.
9. Stay within your limits
Avoid borrowing money from friends, family, or well-meaning investment advisors for investing. Using someone else's money is known as leverage, and while it's an excellent strategy for the experienced investor, it's often catastrophic for a new investor, compelling them to repay not only their own losses but the other investor's money if the stock price drops.