When you think about investing as a whole, what comes to your mind?
Some popular answers could include stocks, bonds, mutual funds, real estate, or even a small business.
Or, maybe other things came to your mind not mentioned in this list.
In a nutshell, investing is one of the most misused and misunderstood terms in the financial marketplace.
The word “investing” is often used correctly in the broad sense of the term, but is typically used interchangeably with words that have similar but distinct differences.
What exactly is investing, why should I consider investing, and how should I go about investing my hard earned cash?
Keep reading to find out more.
What is Investing?
According to Investopedia, an online financial education resource, investing is “the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.”
In the broad sense of the definition, investing can be any monetary funds used to try and turn a profit, although the process can be considered a game of risk versus reward.
This is why beginners often ask the question, “Is investing really worth the risk?”
Inflation, where your money’s value plummets or erodes over time due to increasing prices, is another relevant factor to keep in mind while investing. Therefore, it’s important to research strategies on how to beat inflation to avoid even higher interest rates.
Investing is about prioritizing hard earned money with the end goal of achieving more profitable returns.
For beginners, investments can be considered monetary assets that help diversify and further develop your financial portfolio in the long run.
The problem is that people often use the term “investing” when they are talking about similar financial actions – most notably saving and trading stocks.
The Difference Between Saving, Investing, and Trading
The following are my definitions of investing, saving, and trading:
Investing implies a long-term approach with a specific goal.
A good rule of thumb is not to put money into the stock market if you will need it within 5 years, which satisfies the long-term approach and allows for market fluctuation.
The goal of investing is usually maximizing growth with an acceptable amount of risk.
The difference between saving and investing is the amount of risk you are willing to take. Savings can be used for short or long-term goals, but usually involve little to no risk.
Most people put savings into guaranteed accounts, such as a CD ladder or savings account.
The goal of saving is often more about the preservation of capital than maximum growth.
Investing is also often used instead of the terms trading, or day trading.
Again, the distinction is the duration of time. Traders make stock trades based on market trends, with the goal of making money with short-term trades.
It is not uncommon for traders to own stocks less than a day, month, or year, whereas investors typically purchase a stock with the intention of owning it for several years.
The goal of trading is not long-term growth, but short-term gains.
Related: Price-to-Earnings Ratio
Is it a Problem to Use These Terms Interchangeably?
In some cases, there may be an overlap between the terms and using them interchangeably is acceptable.
But, using the terms incorrectly may cause confusion for someone who doesn’t know the difference between the terms saving, investing, and trading.
Of course, you may see these terms defined differently depending on the source, but the definitions provided above serve as a great point of reference.
Nonetheless, it is important to understand the distinctions between these terms – it will help you set up your short and long-term financial goals with a more confident footing.
Whenever the topic of investing comes up, first-time homeowners often wonder whether they should pay off their mortgage early or allocate any extra funds toward investments.
If you’ve never invested before, it can be scary to start, and the process can seem quite complicated at first. Investing is one of the best ways to lay a secure foundation for your family, but it’s overwhelming to create a portfolio and let your money start working for you.
However, it’s important to not start investing blindly and without a clear sense of direction. With a little time, research, and self-reflection, beginners can start formulating their personal approach to investing.
Before seriously considering any investment opportunities, potential investors should be mindful of the following:
- Calculate Your Net Worth. Determine the total value of what you own – from your home and car(s) to any valuables or existing investments. Once you’ve got this down, deduct sizable debt totals, such as student loans or home mortgages. Your long-term focus is to increase this number.
- Understand Asset Allocation. One of the fundamental concepts of investing is asset allocation. The conventional goal is to appropriately diversify one’s financial portfolio. Asset allocation also involves determining one’s risk tolerance, goals, and ideal time frame for investments.
- Pay Off Sizable Debts. If you need to tackle a handful of high-interest debts, such as credit card debt or car payments, go ahead and do this before considering any investment ideas. In fact, doing so will help increase your cash flow and net worth overall.
- Establish Cash Emergency Fund. Instead of turning to shiny plastic when unforeseen emergencies occur, set up a cash emergency fund early to cover at least three to six months of living expenses. The key is to let it slowly build over time, especially as newlyweds add new members to their families.
- Differentiate Wants and Needs. Even though we are bombarded with impulse buys every day, train yourself to withstand these temptations. Create a budget where you determine day-to-day essentials and more discretionary funds. When you spend less money, that’s more money in your pocket.
- Understand Investment Options. When it comes to investing, it may seem like the options are virtually endless. Maybe you want to start off with a mutual fund or explore peer-to-peer lending. More seasoned investors, like the famed Warren Buffett, may instead look into the best retirement accounts available on the market.
Although there are other relevant factors to consider that span beyond this list, the items featured above serve as a great point of reference for first-time investors.
When Should I Start Investing?
Whether you’re navigating new territory or have been strategically growing your wealth for years, most investors would attest to this: delve into the world of investing sooner than later.
Ideally, this would be in one’s 20’s or 30’s when starting to develop a disciplined budget and healthy spending habits, and to take advantage of compound interest. If you’re a parent, teaching your kids to invest can be a great way to imbue these habits even earlier.
In other words, the sooner you develop investing goals and a solid investing strategy, the longer your investments have to bear fruit, from bull markets to, well bear markets. In fact, there’s an opportunity cost in waiting to get started, as you’ll potentially miss out on time you can’t get back.
There’s a saying that goes, “Time in the market, not timing the market.” It means you have a higher likelihood of being successful by simply getting your money to work for you as opposed to waiting on the sidelines to try to time the market or figure out what to do.
Nobody likes to take a loss, but it’s inevitable. It’s a part of the process in long term investing. You can’t win every time.
But knowing what you can afford to lose, and what you can afford to invest is powerful.
Young adults, for the most post, not only have a more sizable disposable income to work with, but also have a higher risk tolerance whenever common investing mistakes are made.
Not everyone wants to rely solely on long-term savings accounts, Social Security, or one’s inheritance to supplement retirement, so investing offers another attractive avenue to consider with tangible results.
Yes, the market can prove quite unpredictable at times, but choosing to invest now, and wisely, can result in decades of potential earnings.
Even if you missed opportunities to invest when you were younger, in reality, there is no age limit to investing.
How Should I Invest?
Just like any other significant financial decision, such as purchasing life insurance or a brand new house, it’s advisable to work with a financial expert to capitalize on tax-efficient investment strategies.
The hardest part can sometimes just understanding where to start, and what’s the best way to get your feet wet in investing.
For example, if you want to invest in stocks, an advisor can walk you through the trend of “buying low and selling high.” It seems easy in theory, but many people don’t understand the many strategies involved in really making the right decisions in the long run.
There can also be additional ways to make any losses you do incur count against your profits, saving you tax money. Yet, used in the wrong way, and you’ve attempted a wash sale.
Or, they can break down the differences between dollar cost averaging and value averaging. While research has shown there can be advantages to investing a lump sum all at once, it has also shown there’s a lot less risk in moving into the market over an extended period of time to weather the potential roller coaster of the markets.
If you don’t have time to visit a brick-and-mortar agency, online stock brokers and robo-advisors are increasingly popular investing alternatives.
Or, if you are comfortable with your financial situation and would like to manage your own investments, many financial advisors recommend investing 10% or even less into something you are genuine about.
Thanks to the Internet, there are dozens and dozens of different ways you can start managing on your own, and it’s not as hard as it looks.
One of the easiest ways is to create an account in a peer-to-peer lending site. The idea of peer-to-peer lending is an ancient idea.
As long as people have needed money, there have been people willing to lend them those funds.
However, if you’d like to take a more traditional route to investing, you can always consider mutual funds, ETFs, individual stocks, real estate, or retirement accounts, such as a 401(k) or IRA account.
Thanks to technology, it’s never been easier to loan money to other people and make a nice profit while doing it. There are sites like Lending Club that make investing as simple as a few clicks.
With Lending Club, all you have to do is create an account, verify your information, and then start investing. You can have an investment account in as quickly as an hour, and then after that, you can start making money through the peer-to-peer websites.
After you have your account, you can start investing in the available loans. You can browse all of the borrowers looking for money, and you can see the different details of the loan.
Lending Club has two separate options for investing. They have a manual investing option, which allows you to go in, look at all of the investment opportunities, and compare them to find the one that works best for you.
If you don’t want to be as hands-on, they also have an automated investment option.
With automatic investing, all you have to do is set your goals and how much you want to invest, and Lending Club will handle the rest. This is a great option for anyone that’s new to investing or doesn’t want to put in all of the hours doing the research.
Another unique advantage of Lending Club is the size of the investments you can buy into. Because these loans are originated by borrowers, you can find loan requests of just about any size, but you can buy notes for these loans as small as $25.
This is a great way to invest your money with some of the extra cash you have sitting in your savings account. This is also a great way to diversify your portfolio without having to open dozens of different investing accounts.
Investing strategies, although broad in focused outcomes, are not one-size-fits-all. It’s critical novice investors define and articulate which strategies work for them and align with their defined risk tolerance.
Another great way to get started in the investing world is to partake in “micro-investing,” which is exactly what it sounds like.
Unlike some investment vehicles, which require $10,000 to start, micro-investing programs allow you to invest with a couple of dollars.
Sites like Acorns are an excellent example of this. After you create an account, Acorns will look at your accounts and your spending habits to determine how much you can safely invest.
They will automatically invest a couple of dollars every month in a variety of different avenues.
Because you don’t have to manually invest the money, this is a great way to boost your portfolio with the spare change sitting in your account anyway.
With an Acorns account, whenever you make a transaction, the app is going to round up to the nearest dollar and then invest in extra cents. They will put these investments in a variety of different ETFs, as well as foreign and domestic investments.
Investing – Better Late Than Never
Making wise investments is one of the best things you can do for your future.
It’s one of the most efficient ways to give yourself a secure foundation for your retirement, but getting started can be confusing and overwhelming.
As you can see, there are plenty of quick and simple ways you can start making your money work for you. If managing your own investments isn’t up your alley, then consult a financial advisor to maximize your specific investment platforms.
It’s not possible to eliminate risk entirely from investing. However, if you never try your hand at investing, you’ll never reap any potential, long-lasting rewards.
You can always start out small and incremental, seeing where your investments lead you.