Beginners Guide To Investing
Introduction
According to a Charles Schwab survey, 59% of Americans consider themselves savers, while 63% of respondents are currently living paycheck to paycheck. Saving is not everything when it comes to building wealth. It is imperative to understand the market and how to invest wisely to attain financial goals with greater ease.
Saving Is Not Everything
Money in a typical savings account is guaranteed to lose money. A standard savings account comes with low interest rates that can’t keep pace with inflation. This means our purchasing power will decrease the longer we save in these types of accounts. There is a way to invest wisely, control the risk associated with investing, and gain meaningful returns.
Benefits Of Investing
The power in investing is compound interest or growth earned on growth. Compound interest means that interest is earned not only on the principal amount invested but also on any interest that has been added to it over time. Investments will grow over time at an ever-increasing rate.
Fundamentals
The market is the platform where you buy and sell shares of stocks, bonds, and other assets. To invest you need to open an investment account – like a brokerage account. You fund these accounts with cash that is used to buy stocks, bonds, and other investable assets. Big-name firms like Schwab or Fidelity have this process like how you would open a bank account.
Stocks
Companies and corporations use the market to raise money for their growth by issuing stock – an individual share or piece of the company that you now own. Stocks are considered riskier because of price volatility. Stock investors are not guaranteed their money back if a company goes bankrupt.
Bonds
The government and corporations request loans to raise money for their purposes and then pay the investor back with interest over time. Bonds are considered a safer investment because they are guaranteed money back if the company fails and are guaranteed to be paid interest on their investments. Bonds are safer but typically have lesser returns compared to stocks.
Your Portfolio
Factors such as your age, amount of debt, family dynamics, and risk tolerance all contribute to how an individual may invest. The rule of thumb suggests that young investors should have riskier portfolios. Young investors have many years to weather the storms of stock market ups and downs. The cash invested is also not relied upon during those primary working years.
Investors close to retirement or in retirement typically invest in a more conservative portfolio. Retirees are dependent on the money they have saved and invested over their primary earning years to live on in their retirement years.
Actionable Steps
- Build an emergency fund (3-6 months of expenses) at the very least.
- Diversify – Mutual funds or ETFs are great starting points because they are made up of many different companies and stocks rather than one individual stock.
- How old are you? How close are you to retirement? What is your risk tolerance? What are your financial goals? Short-term? Long-term? These are all questions that will help you design your portfolio.
Conclusion
Becoming literate in investing does not mean everything will go exactly as planned or you will have the market figured out. This is simply a guide on a long journey of saving, diversifying, and building wealth for your future.
Matt’s Corner
