Investing 101
What is Investing
“Investing expends money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture”.
Why Should You Start Investing?
By investing, you are allowing your money to work for itself while also beating inflation.
When inflation occurs, an increase in prices start and the purchasing value of money goes down.
For an example, $1 in 2010 is now worth $1.14 in2018 due to inflation. Prices are up 14% from 2010 compared to 2018 in the U.S. economy. We currently have an average inflation rate of 1.65% per year between 2010-2018. This means that, if you had $1 sitting in your bank account in 2010 and let it sit in a checking account, it is not worth $1 in 2018 anymore. It will be worth around $0.86 cents.
One of the biggest benefits that investing has to offer is that it allows your money to gain interest and grow with or above the average inflation rate.
Investing Options
There are tons of different investment options out there. Depending on your risk level, age, and goals, there are investing strategies that align with each. As an example, I’ll use a millennial. As a millennial, the rule of thumb is to take a riskier approach when investing because we have time to recover in case of a recession or if you have any big losses.
As a Generation X, or Baby Boomer, you wouldn’t want your risk level to be as high, so you would start to re-allocate your investments towards more stable and safe investments. The reason for this would be you may not have as long to save and grow interest on your money as Millennials would.
What Are My Options?
- Stocks
- Bonds
- Real Estate or REIT’s
- Bank Products (CD’s, and Money Market Accounts)
- Investment Funds (ETF’s, & Mutual Funds)
- Annuities
- Savings for College (529 Plan)
- Retirement
- Commodities (Gold, Silver, Crude Oil Ect..)
- Insurance ( Life Insurance)
- Cryptocurrency
What Are Typically More Risky Investment?
- Cryptocurrency (Bitcoin, Lite Coin ect..)
- Stocks
- Real Estate (Residential, and Commercial Property, Land)
- ETF’s & Mutual Funds
What Are Typically More Safe Investment?
- Bank Products (CD’s, and Money Market Accounts)
- Bonds
- Commodities (Gold, Silver ect..)
- 529 College Plan
- Savings Account
Fixed Investments That Are Guaranteed
- Annuities
- An annuity is a fixed sum of money paid to someone each year, typically for the rest of their life)
- Insurance/Life Insurance
- Life Insurance pays out a sum of money either on the death of the insured person or after a set period)
- 529 College Plan (Kinda Sort Of)
- A tax-advantaged investment option that allows you to save money for your children’s college fund and in return getting a tax benefit/break
- Savings Account
- Bonds
- Dividends from Stock
All of these different options have its pros and cons but what it comes down to is your financial literacy and what information you need to know to make educated choices.
What Are the 3 Most Common Stock Investment Strategies?
- Growth Investing
- Focuses on the companies that have high potential for growth.
- Value Investing
- This is a buy and hold technique. This focuses on blue chip stocks or any company that has good fundamentals but may take some time for the stock price to go up.
- Income Investing
- Focuses on investments that provide a reliable income stream with minimal risk such as monthly, or quarterly dividends from a stock, REIT, ETF, or Mutual Fund.
When Should I Start Investing
The answer Is simple.ASAP!!! As a millennial, we have the power of compound interest.Compound interest is the addition of interest to the principal sum of a loan or deposit, or in simpler terms, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
This fancy definition is basically saying, if you keep your money in an investment account without withdrawing your funds, your interest will gain more interest on itself and it will continue to grow higher as the years go on.
The earlier you start, the better
Whether you’re in your mid-20s or mid-60s, it’s never too late to start saving. If you can afford to put away even $100 a month, starting now, compound interest will reward you.
For example, at age 25, a $100-per-month ($1,200 yearly) contribution at a 1.5% annual interest rate will turn into nearly $67,000 by age 65. If you were to start at age 65, this same investment amounts to just around $5,000. Something is better than noting but starting early clearly demonstrates that the longer you can let your investment sit and earn interest, the better.
Now 1.5% is the percentage you will get on a high interest savings account. If you were to invest that same amount into an investment account starting at 25 years old and make an under average return of 6% year over year you will have saved around $197,000.
Where Do I Go To Invest?
- Broker (Free, or low commission and fees)
- A good broker for millennials or anyone in general is Robinhood.
- Robinhood is free of commissions and it is also free to trade which is a one of its kind
- Where it lacks is the amount of resources provided for you
- If you want resources and help, your best bet would be to go with a known company such as:
- Charles Schwab
- Interactive Brokers
- TD Ameritrade
- An alternative is a Robo-Advisor
- If you’re still learning or you would rather be hands off with your investments, this could be a good option
- Fees do apply so make sure to look into exactly how much that will cost you
The Bigger The Risk The Bigger The Reward
Overall, Millennials should have more risky investments while Generation X and Baby Boomers should focus more on a less aggressive module to maintain their investments while choosing value options with long-term growth.