Investing Tips To Consider
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If you’ve ever watched a financial news report or looked through a copy of the Wall Street Journal, you know that investing is important. And while we learn about geometry and algebra in school, no one teaches us how to invest.
Unfortunately, if you don’t learn how to invest, you may never be able to retire and live the life your 65-year-old self deserves.
Keep reading to understand how investing works, why it’s important and what to avoid.
Why You Should Invest
Simply put, unless you’re a trust fund baby or have won the lottery, you need to be investing. Here’s why. Because the cost of goods and services rises over time, the dollar you earn today will be worth less than a dollar in the future. This concept is also known as inflation.
If you put $100 in a regular savings account, that $100 will buy you fewer goods in the future. The only way to ensure that your money is worth more in the future is to have it grow at a rate that is higher than inflation. Investing in the stock market is one of the best ways to do that.
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The only way to ensure that your money is worth more in the future is to have it grow at a rate that is higher than inflation.
What is Investing?
In general, investing means buying a piece of ownership in something in the hopes that it will increase in value over time. You can invest in the stock market, by purchasing a business, by buying a rental property and more.
Investing in the stock market means having a piece of ownership in a company. While you own a share, the value of that share can increase or decrease in value. If it increases, you can sell the share and realize a profit. But if the value drops and you sell the share, you will lose money.
There are two main investing philosophies: buy-and-hold and day trading. Day trading is when you buy shares and sell them quickly, hoping to make a profit. Day trading is often largely unprofitable, especially because you’ll pay higher fees when you sell stock so fast after buying it.
Buy and hold refers to owning shares for years or decades. It’s one of the most reputable investing strategies, especially if you’re building a nest egg for retirement.
Ways to Invest
In an Employer-Sponsored Plan
Many companies, especially larger firms, offer 401(k) plans where you can start saving for retirement. Plus, these companies may also contribute money to your 401(k), which is essentially free money. For 2024, the annual contribution limit is $23,000 for employee contributions and $69,000 for both employee and employer contributions.
The downside to a 401(k) is that you’re limited to the company’s stocks, bonds and funds. Also, you may have to work there for a certain number of years to qualify for 100% of the employer’s contributions.
By Yourself
If your company doesn’t offer a 401(k) or if you’re self-employed, you can open an Individual Retirement Account (IRA). With an IRA, you have the freedom to choose which funds you want to invest.
The annual contribution limit for an IRA is lower than a 401(k). For 2024, the limit is $7,000 or $8,000 if you’re 50 or older.
Remember, avoiding the IRS will only cause you to rack up more fees. Ask them what your repayment options are and confirm what the fees are.
Use a Robo Advisor
If you don’t feel comfortable setting up an IRA with an investment company, you can also use a robo advisor like Betterment, Wealthfront or Ellevest. A robo advisor will ask you basic questions like when you hope to retire, how comfortable you are with risk and what kind of retirement you want to have.
The robo advisor uses an algorithm to determine the best investing recommendations and will also recommend how much to save every month to reach your retirement goals.
What to Know Before You Start Investing
Beware of Those Who Promise to Beat the Market
If you meet an advisor who claims they can help you beat the market, run away. The best thing you can do is to match the stock market. Over the last century, the S&P 500 – which is one of the benchmarks for the stock market – has averaged about 10% annually. If you can replicate that kind of return, your money will go a long way.
Many advisors who say they can beat the market engage in active investing, which comes with higher fees than passive investing. Unfortunately, time has shown that active investing is not more effective than passive investing.
In fact, Warren Buffet once won a $1 million bet with a hedge fund manager, proving that passive investing beats out active investing.
Opt for Diversification
When beginners think about investing, they often imagine buying shares of popular companies like Google, Amazon or Facebook. And while that may pay off if you get lucky, it’s also a big risk.
A basic rule of investing is to diversify your portfolio, which means reducing the chance of your investments doing poorly. You can do this by owning shares in multiple companies in different asset classes.
An easy way to achieve diversification is to invest in an index fund. An index is a measure of the stock market, and an index fund will track that index. For example, the S&P 500 is a group of the 500 biggest publicly traded companies in the US. An S&P 500 index fund will track the S&P 500.
When you buy one share of an S&P 500 index fund, you own a small sliver in 500 different companies. This is one example of diversification.
Don’t Follow Your Emotions
One of the biggest mistakes of investing is panicking when your investments fall in value and selling. The stock market is like a rollercoaster – it has to go down at some point. Downturns in the market are natural, and if you look at the market over decades, it always rebounds.
The problem with selling when the market is down is that your investments are at their lowest point. It’s essentially like locking in your losses. The best course of action is to stay invested no matter what happens.
In fact, buying more investments when the market is down is like buying something on sale. You get more bang for your buck.
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