Starting to invest is much simpler than most people believe. Investing isn’t about knowing what “hot” companies are, watching lots of stock charts or becoming a financial genius overnight. Instead, it is all about being patient, consistent, and not building it up in your head.
Think about the future. If you are 30 or 40 years from now, do you really want to depend on your paycheck until you die? This is why investing quietly does all the hard work for you long before you are even going to use the money.
Before we talk about methods of investing, we first need to clarify what investing really is. It is simply using money you have earned for a specific purpose by purchasing an asset (like stock or a bond) you believe will appreciate in value over time. You should understand that this is not for short-term gains but for long-term stability. Investing is a slow, boring process and requires a lot of patience. If you buy today and sell next week, that is called “trading” and not “investing.”
The true secret to succeeding with investments is finding the time to grow your money. A person who starts saving at an earlier age (25) will have a significant edge over a person who waits until (45) to set up a similar investment plan and invest a similar amount each month. Compound interest has to have sufficient time in order to realize its full potential; therefore, if you begin investing early, the advantage you have is even greater.
When considering your priorities regarding investing, if you are heavily in consumer debt (credit cards, car loans, etc.), you should first eliminate this type of debt before investing. Most forms of consumer debt will grow faster than most forms of investment, thereby making it more profitable for you to eliminate your consumer debt now, so that you will have the momentum to make investments later.
Investment accounts can be thought of as “containers”; while there may be different types of tax benefits and other regulations to take into account based the type of investing you’ve done, it’s what’s inside these containers that makes investments grow. For the beginning investor, three types of containers will most likely offer the greatest benefit.
The first type of container you should consider is a “401(k)” account.
Typically, your employer will offer you a 401(k); your employer will not only withdraw the amount of money from your monthly paychecks to establish the fund, but they will also deposit an equal amount of money from the company’s own funds to establish the same investment. A significant benefit to this type of investment is that your employer may match your contributions to your 401(k). Essentially, your employer is contributing money to your retirement plan at no cost to you. There’s really no way to top that advantage.
Next is the traditional IRA.
This IRA is not tied to a particular job. You can set up your own by going through a brokerage firm and starting to put money in a traditional IRA whenever you want. The good thing about a traditional IRA is that the money you contribute now reduces your taxable income (federal and state) right away, and you’ll pay taxes on your traditional IRA when you withdraw the money during retirement.
A Roth IRA reverses the tax treatment of your traditional IRA. You pay taxes on your money when you put it into the account, invest it later, and then the money you take out during retirement is tax-free (no taxes are due on it at all). This is especially beneficial for many younger investors as they build their retirement accounts.
A target date fund is basically an investment portfolio that is built ahead of time so that it is created for you based on your expected retirement date. Target date funds get more conservative with age, as you will likely have a smaller amount of equity in them and will be investing for retirement for a longer period of time. You simply select a date for your retirement, place your money in a target date fund, and the fund will automatically manage that money for you.
If you’re curious about investing but don’t know where to start, consider investing in index funds. Index funds are investment vehicles that invest in many different stocks instead of just one company’s stock. They are generally less expensive, provide more diversification, and are less stressful than investing directly in individual stocks while also providing good company growth opportunities. However, when investing in index funds, please be aware of fees – always try to find an index fund with the lowest fees.
One thing to be cautious about when getting started is investing the majority of your capital in just one company stock. Although a single company stock can increase rapidly in value, it could also drop in price just as quickly as it rose. By investing in a wide range of companies through index funds, an individual will have a more diversified portfolio of assets across an entire sector and, therefore, provide better opportunities for the overall growth of his or her portfolio.
Successful long-term investing isn’t about being flashy but about being consistent over many years. A successful long-term investor is someone who invests consistently over time regardless of ups and downs in the marketplace and who does not attempt to outsmart other investors. Timing the market perfectly is not the key; the key to success is staying invested long enough to take advantage of the effects of time on capital growth. The stock market does not discriminate against novice or experienced investors. Starting early, remaining consistent with your investments over time, and keeping your investment strategy simple will ultimately yield better results for your future self than if you had tried to figure it out for yourself today.
