You’ve spent so many tedious years working your butt off. Your income keeps growing and you’re able to save more and more money each year. Eventually, you start noticing extra money coming out of your pocket that you don’t need. Before tucking this money away into your savings, ask yourself this, “where should I invest it”? You cannot simply just put your money away into a savings account and hope that it will magically grow into a million dollars. Savings accounts are not meant to grow your savings, plus the value of your money will depreciate with inflation.
The truth is that your money should be invested in high compounding assets that will increase in value over time. Investing is an art, and like any art, it’s going to take practice and learning to get better at it. It’s unequivocal that you take the time to learn how to invest since blindly putting your money into anything can have serious consequences.
There’s no point in investing if you’re going to lose more than you gain. Of course, investing is important for building wealth over time; yet, does it pay off if you don’t understand how to? This is where you must separate your mindset from other investors and realize what it is you understand and are comfortable with.
Where to Invest Money: In Individual Stocks
As the epitome of rapid gains in the market, individual stocks have the biggest potential to make any investor wealthy. Stocks are one of the best assets to invest in due to their liquidity and their astronomical returns. But with this great profit potential comes even greater risk. With the high returns that stocks offer investors, they still can lose their value quickly. The key is to pick great companies at cheap prices, thereby calculating your risk. You must view your stock for what it is; a business that has some type of cash flow.
Choosing individual stocks, however, can prove to be more of a challenge than you expected. If you think you’re going to invest like Warren Buffet by just reading a few articles online, think again. To be as successful as someone like Buffett will require years of learning, patience, and diligence. The challenge of finding the right stock can be an insurmountable one if you already have an established career and work full time.
Thus the biggest obstacle with investing in individual stocks is time. Without putting in the time to learn, you risk losing money, and you’re probably better off investing in an index fund. If you make a mistake and pick the wrong stock, you will end up losing a lot of money; and that’s not what we’re here for.
Where To Invest Money: Index Funds
Another popular way to invest your money in the stock market is through an index fund. An index fund is a large mutual fund that contains stocks that are identical to a stock market index. The index fund is set to match an index like the Standard and Poor’s 500 index. The main purpose of an index fund is to invest in a very broad and diverse portfolio that basically is backed by the increase of the economy and consumer spending. Index funds are low risk and steady gain. Overtime their returns essentially compound themselves with little to no downside.
Index funds might be a safe and steady way to make money over time, but they’re not completely risk-free. The risks associated with investing in index funds are not common but will hurt when they occur. If the S&P 500 loses 40% of its value in the next 30-40 years, which is possible; then your investments will take a hit. So if you have your money in there when that happens, your retirement will be reduced by 40%. This is what happened to baby boomers in 2008 with the housing bubble.
Index Funds and Retirement
Fear not, however, for even the greatest of economic troubles this country has endured has only lasted for a maximum of a decade. So even if you do happen to lose 40% of your savings, the wise thing to do would be to stay put. Sure you might have to work for longer than you had anticipated, but it’s still better than losing almost half of your savings. The market will always recover, the odds that the American economy will fail in your lifetime are slim to none.
Moreover, if you start young ( in your early 20s) and invest $1,000 into the S&P 500 by also adding $600 to it monthly, you should retire a millionaire in 30 years. The S&P 500 has an annual return of 10% and $600 a month is 20% of an average college graduate’s monthly income. Over the course of their careers, college graduates should have no problem retiring with a million dollars.
Mutual funds are similar to index funds in that they are a compilation of different stocks put together into one investment account. The difference is that there is more risk in a mutual fund than in an index fund since there are fewer stocks. There is less risk however, in a mutual fund than an individual stock due to its greater diversity. Dave Ramsey explains how investing in mutual funds can benefit you as an investor in his popular blog post, How To Invest Start Investing: A Beginner’s Guide.
Invest Your Money In Bonds
Bonds are a great way to offset the risk associated with the stocks by acting as a defense against volatility. The bond is bought by you, the investor, in an effort to promote government spending. Bonds are purchased due to their reliability, in that they are essentially investments insured by the federal government. This, “insurance” can act as a shield against stocks when they start to fluctuate in value.
Younger investors are encouraged to buy fewer bonds and more stocks since they can juggle the risk with their ample time. Yet, for the older investor, it might be wiser to buy bonds than stocks. Someone looking to retire might not want to have to deal with the volatility of the market and instead favor bonds. Either way, you look at it, bonds can be an excellent addition to anyone’s portfolio.
Invest In Some Real Estate
Real estate is a great way to build wealth. Unlike stocks, real estate is in your full control as the investor. You have the power to change anything you don’t like about the property. One of the downsides, however, is that it is not as liquid as stocks. Real estate markets are less volatile than the stock market due to their lack of liquidity. You just don’t see the type of mass selling and buying that you do in the stock market. That is why you can see housing prices stagnate for years and increase only when housing is in demand.
However, this should not discourage you from putting your money into a piece of property. Real estate, when done right, can make you very, very wealthy. Real estate investing precedes all other forms of investing in history.
The main issue is that people jump into it without doing their ample homework. Doing your homework when buying real estate is extra important. Take your time, do your due diligence, and eventually, you will succeed.
So where should you invest your money? The answer is either in wonderful stocks that you know will go up in value, a group of stocks that will go up in value; or into pieces of property you know will go up in value. The most important thing is that you take the time to learn how to invest so that you can secure a comfterable future for yourself. Build a nest egg will be one of the best things you will ever do because when it will come time to retire, you’ll have plenty of money to rest on.