The Basics of Investing
The term “investments” can be used in a multitude of ways - and it’s a concept most of us are familiar with to some degree. Unless you’ve really taken an interest in the markets for some reason or set aside time to study their inner workings, you may not have a complete understanding of what investing really is, everything involved with investing or what different types of investments are available to you. Before you do a deep dive into theories, past performances or principles, let’s get you up to speed with the nuts and bolts of investing and what we think you should know as you take the important step to begin growing your financial knowledge.
Investing? What’s That?
Simply stated, investing is the process of giving your money to another entity (such as the government or a company) with the hope that they will return more money to you (a profit) at a later point in time. Sounds easy enough, right? You’re giving money to another with the expectation of gaining more in return. This introduces the idea of weighing risk versus reward.
Explaining Risk
When you invest your money, you have the potential to lose it. Generally, the higher the risk of an investment, the greater the potential reward. But the greater reward is only a possibility, not a guarantee. Every investment vehicle and product comes with its own set of risks, from determining how quickly an investor will be able to access their money when they need it, to figuring out how fast their money will grow where it is.
Everyone’s tolerance for risk is unique to them. It even varies between married couples, sometimes widely. Time horizon is a common determining factor, meaning how far away they are from retirement, where they will need to be able to access the money they have invested. Another component could be how much money they are willing to risk losing without it having an adverse effect on lifestyle.
Can’t I Just Stash Cash Under the Mattress?
If investing in and of itself is a risk, why do we do it at all? Because of inflation, the value of a dollar in your hand (or under the mattress) is continuously deteriorating - this is what makes investing such an appealing choice for many people. The basic idea is to put a certain amount of your dollars in a place where they’re expected to earn more in the future than a dollar left sitting in savings. This assumes a positive return is earned, which isn’t a guarantee.
You should always work with your trusted Financial Advisor to make sure you are investing your money properly, taking your goals and risk tolerance into consideration.
Investment Types
You’ve likely heard of the term “diversification” in regards to investing. Diversification refers to having a variety of different asset classes or investment types in your portfolio. This is an important strategy investors use to help reduce risk.
Here are a few common types of investments you could use to diversify your portfolio:
- Stocks: Giving your money to a specific company, earning you a share or piece of the company in return.
- Mutual funds: Using a professional money manager, pooling your money together with other investors and purchasing a group of stocks, bonds or a mix of both in a single transaction.
- Exchange-traded funds: Index funds that can be traded on an exchange throughout the day, as the prices of stocks fluctuate.
- Savings Bond: Loaning your money to the federal government, with a minimum guaranteed interest.
Whether you consider yourself a do-it-yourself investor or you want to work with a financial advisor to develop a tailored portfolio just for you, it’s imperative to understand the basics of investing, what your options are and the risks involved with seeking different levels of returns.