The 2020 pandemic hit many companies hard, while other companies took it as a chance to grow, seemingly unaffected by the state of the world around them. NVIDIA (NASDAQ:NVDA) came out as one of those thriving businesses and achieved gains of 122% in 2020. The company’s graphics processing units (GPUs) were present and needed for trends that accelerated exponentially due to the pandemic, boost...
Are you thinking about investing? Congratulations! Even considering investing within your financial decisions shows that you have great insight and potential to have full control over your wealth and the ability to grow it over time.
Investing your money is the most dependable way to increase your wealth over time. However, you need knowledge when investing your hard-earned money. With enough understanding of how different types of investments work, you will make informed decisions and grow your assets safer.
How can I invest my money?
Let’s take a quick look at the best ways to invest your money:
Probably the most popular investment type. Stocks are investments in a company’s future growth, expansion, and success. When you own stocks from a company, you own tiny pieces of it. When a company grows, you profit along with them.
People borrow money. It is a useful way to compensate for the money you don’t have at the time but will be able to pay back in the future. Just like people borrow money, companies and municipalities also borrow money using bonds, which will be returned with interest over time.
Index Funds track market indexes (usually made up of stocks or bonds) and typically invest in all components that make up the index they track. They also have fund managers that ensure the fund performs the same as the index does.
Exchange-traded funds, or ETFs, trade similarly to stocks. They are an easy way to start investing, as they can generate returns without needing to risk or spend too much. They allow investors to buy many stocks or bonds at once, and the money invested is used or revolves around the same objective. For instance, buying an S&P 500 ETF, you will be investing in 500 companies.
Before jumping to invest in all of these, you need to be aware of the best investing style for you. Ask yourself these questions:
- Will I invest my money actively or passively?
- What are my resources? What’s my budget?
- How much financial risk am I willing to take?
Actively or Passively?
You can do your investing in two ways: active investing or passive investing. Both investing styles have their own merits, as long as you aren’t looking for short-term gains. You determine this after taking into account your financial situation, lifestyle, needs and interests.
Active investing is taking the time to research investments on your own and building and managing your portfolio by yourself. If you’re thinking of buying and selling stocks through an online broker, you’re well on your way to investing actively.
If you want to be an active investor, you will need time, knowledge and drive. Active investing requires doing research, analysis, and investing time in learning about the market. You will also need to keep up with your investments’ performance after you made them. Many people would rather spend their time on something else than their investment, which is alright, given that passive investing is a thing. However, if you want to actively invest, which usually leads to more significant returns, you will need to put the time and work into it.
In summary, active investing involves:
- More work, risk and reward.
- Making the investing yourself.
- Invest time in research, knowledge, and analysis.
- Potential for massive returns that can change your life.
Passive investing offers the ability to put a vehicle on autopilot. You will get good results over the long run, and the effort you have to put into it is significantly less. In simpler terms, passive investing revolves around investing your money in investment vehicles where someone else does the research, analysis, etc. Mutual funds are a great example of passive investing.
In summary, passive investing involves:
- More simplicity, predictability and stability.
- Hands-off approach with where the money goes.
- Moderate & predictable returns.
- Less work.
What’s my budget?
How much money can you invest?
People usually recommend having enough money to start a $1,000 portfolio, but you can start with $100 (sometimes even less). The amount of money you start with doesn’t matter when you are ready to invest and can invest money frequently over time.
An important consideration is to establish an emergency fund. Emergency funds are used to cover potential, unforeseen costs that can cause you to sell your investments.
Most professionals recommend an emergency fund must cover six months’ worth of expenses. However, you don’t need this big of a fund when you start as long as you are financially stable and aren’t forced to sell your investments later. The fund is just a way to prevent this.
It’s also a wise thing to get rid of any high-interest debts before starting to invest. If you invest your money in the stock market and expect returns of 9%-10% but have to pay 15% or higher APRs, you will lose money in the long run if you aren’t careful.
How much financial risk am I willing to take?
Not all investment projects are successful. All investments have their potential risk. Usually, the higher the risk, the higher the returns.
It is essential to balance the risk you want to take and the returns you wish to obtain. Bonds offer low risks but low returns (2-3% on average). On the other hand, stocks usually have an average return of 10% per year, but it depends a lot on its success. Let’s go into specifics in the stock market. For example, the risk associated with blue-chip stocks from a company like Apple (NASDAQ: AAPL) and stocks from other emerging companies is massive.
You should consider how much you are willing to invest, risk, and obtain. The market is subject to constant change, and not all investments succeed. If you find balance, you will be successful in the long run.
There isn’t a perfect answer as to what to invest in. It depends on you. With the information above, you are more prepared to make an informed decision. Choose the best investment style for you and start with what you can. Be informed, be smart, be financially healthy while investing.
Investing is intimidating, more so if you are a beginner. However, if you ask yourself the questions above and have everything in place before you start, you’ll be ready to invest and make your money work for you.