How to Invest Your Money
One of the most reliable ways to build wealth over time is by investing your money. This is how to make your money work for you.
The best way to invest your money is by figuring out your investing style, budget, and your risk tolerance.
Become a member of Insider weekly to get Asymmetric Investment Ideas From Around The World!
As an investor, you are either an active or passive investor. When it comes to investing, both have merits, as long as you stay focused on the long-term and aren't just looking for gains in the short term.
Your lifestyle, budget, risk tolerance, and interests might give you a preference for one type over the other.
Active investing is simply taking the time to research investments, constructing, and maintaining your investment portfolio by yourself.
If you have plans of buying and selling individual stocks through a broker, you are an active investor.
For success as an active investor, you need to:
Active investing requires lots of research, basic analysis, and close monitoring of investment opportunities after you buy them.
You should familiarize yourself with the basics of how to properly analyze and research stocks before investing in them.
Passive investments have historically produced strong returns, and there's nothing wrong with this approach.
Active investing also has the potential for superior returns, you may have to want to spend a good amount of time to get it right.
With passive investing, you'll still get good results over the long run, and the effort required is far much less.
Passive investing involves putting your money to work in managed investment vehicles like mutual funds or use a hybrid approach.
More risk, effort, increased returns
Investing is self-managed or through a portfolio manager
More research required
Potential for big returns
Passive vs. Active Investing Comparisons
Simple, stable, and predictable
To start a portfolio, you can begin investing with as low as $100.
Make sure you're ready to invest money more frequently over time.
Establish an emergency fund by setting aside cash. Investments, whether stocks, mutual funds, or real estate, have some level of risk.
The emergency fund is your safety net to avoid all this.
Most financial planners suggest setting aside an ideal amount of cash that is enough to cover six months' worth of expenses.
You don't want to have to sell your investments every time an unforeseen expense comes up.
The stock market has historically produced returns of 9% to 10% annually over long periods.
It's also a smart idea to get rid of any high-interest debt such as credit cards before you start to invest, in order to avoid losing money over the long run.
Learn how to weather short-term shifts in the stock market if you're investing for the long-term.
Stocks and bonds have huge differences in risk. For instance, Treasury bonds are low risk investments and also have relatively low interest rates.
Savings accounts have an even lower risk, but also offer a low reward.
A high-yield bond can generate higher returns but will come with an increased risk of default.
For stocks, there is a huge difference in risk between blue-chip stocks like Apple (NASDAQ:AAPL) and penny stocks.
Investments have lots of risks which correlate with returns. You need to find a balance between maximizing returns on your money and finding a risk level you are most comfortable with.
For instance, returns on stock can vary widely depending on the company and time frame.
The whole stock market on average returns almost 10% per year.
By contrast, bonds on the other hand offer predictable returns with very low risk, but they also yield low returns of around 2-3%.
What should you invest your money in?
There is no perfect answer. The best type of investment depends on your investment goals.
If you have a high risk tolerance, have the time and desire to research individual stocks and to learn how to invest properly, investing in stocks could be the best way to go.
If you have a relatively low risk tolerance but want higher returns than you would get from a savings account, investing in bond funds may be more appropriate.
If you don't want to spend hours on your portfolio, investing the money in passive investments such as index funds or mutual funds can be the best choice.
To invest money, figure out how you want to invest, how much money you should invest, and your risk tolerance.
You will be well positioned to make smart decisions with your money that will serve you well for many decades to come.