Why Should You Invest?

Why Should You Invest?

People have different motivations for investing, but the most common motive is wealth building. Indeed, no one gives away their money with the expectation of losing it; this holds true whether they are saving for retirement, college or any other reason. Even in a market downturn, investing is among the best ways to grow wealth over time. In fact, returns from such investments are much higher than those from traditional savings accounts which offer an average return of only 0.24 percent per month. This means if you put $10,000 into a savings account, it would only increase to $24 after a month. The returns will change depending on market conditions, your choices on investments and assets in your portfolio.

The following data shows how some common types of investments could have performed over a thirty-five-year period. It was compiled by Brent Weiss who co-founded Facet Wealth and Bloomberg Terminal and also provides both “nominal” (not adjusted for inflation) as well as “real” (adjusted for inflation) returns on a $2,000 investment (as of July 2022) held from 1987 – 2022.

How Do Investments Work?

Investing involves buying a particular asset in the hope that its value will increase over time. If an investor sells an asset whose value has increased, this is called a capital gain. However, assets do not always appreciate; sometimes they depreciate in value. The degree of changes in value may be influenced by market forces and performance of companies among other factors. Normally, riskier investments present potential for higher returns as compared to less risky ones which usually give lower returns.

Different Types of Investments

Before you start investing, it’s important to understand the different types of investments. Understanding these different types will enable you to decide which assets might work for your portfolio. Some examples of investment types include:

Stocks

Purchasing stocks or equities means becoming a shareholder in a company. Issued by companies and traded on stock exchanges stocks enable raising funds for projects and future growths. Shareholders receive dividends from some stocks on either monthly, quarterly or annual basis while others don’t pay dividends at all. It is also worth mentioning that fractional shares are possible with some platforms by which you can buy stocks as well depending on the platform used by an individual investor. There are typically two kinds of stock: preferred stock and common stock; common stock is normally offered by public firms although some issue preferred stock also but there are key differences between them e.g., while dividend payments aren’t always offered with common stock this is usually made when it comes to preferred ones.

What Are Mutual Funds?

An investor’s money is pooled together with that of other people who have similar investment objectives. This pool of money is then invested in a portfolio of different securities by the fund manager. By owning a share of the mutual funds, you are basically holding a small piece of all those assets in the basket. If you buy shares in several different assets, your portfolio is said to be diversified. That means your risk exposure across asset classes can be reduced for example during a market crash. Again, many mutual funds are managed actively such that they are suitable for people who would like less active involvement with their investments. Nevertheless, they do require relatively high minimum investments and charge exorbitant fees.

What Is an Exchange-Traded Fund (ETF)?

The same way as mutual funds, ETFs offer investors an opportunity to invest in a group of various assets. However, unlike mutual funds which can be bought directly from an investment firm, exchange traded funds trade exclusively on stock exchanges. They are something between the mutual fund and the stock itself. These products can offer diversification to people who want it but do not want large minimum amounts or high expense ratios charged by traditional mutual funds. Unlike mutual funds, they don’t have sales charges but may carry annual expense ratio payments by investors.

How Do Index Funds Work?

Index funds (mutual or exchange-traded) imitate well-known stock market indices such as S&P 500 or Dow Jones Industrial Average (DJIA). The index it follows incorporates its investments into it i.e., holdings within this index match up with what’s found inside this indexed fund? They tend to cost less compared to hand-picked ones too among financial experts. Also known as passive investment options; these types of retirement accounts differ greatly from actively managed portfolios such as mutual funds.

Why Do Companies Issue Bonds?

When companies or governments need cash they turn to bonds: essentially loans provided by investors to corporate or governmental issuers. The main reason is often to fund a specific project of finance an operating activity. In return, the issuer promises to pay you back the principal investment, which is what you paid for the bond and any additional interest on it. Bonds are usually offered at a specific interest rate, so that investors get returns (interest payments) twice as much as face value per year. They are often viewed as low-risk instruments with guaranteed income as long as the debtors can afford to meet their obligations.

What Is a Certificate of Deposit (CDs)?

The investor receives a higher than average rate of return compared to other investment options in this product type. A customer must keep money in his or her CD account for a certain amount of time to earn this high rate of return. The range for these CDs is typically from three months up to 60 months however, sometimes certain banks offer longer terms. While traditional savings accounts have an average yield of 0.21%, on average a 60 month certificate could bring in .93%. This type of account carries less risk than your typical savings account while offering better returns than most other investments.

What Are Retirement Accounts?

Retirement plans do not constitute an investment category but they remain one of the most popular methods for investing funds within retirement age group individuals. Common examples include: 401(k), Roth IRA, Traditional IRA; dependant on the sector, particular programs may be available for teachers or self-employed workers like doctors and lawyers as well.

Options

Options are contracts which derive value from underlying assets such as stocks, securities and bonds. Some investors who buy options enter into a contract that gives them the right to purchase or sell an asset at an agreed price within a given timeframe. The two most common types of options are put and call options. Options can be speculative and complex, thus generally more suited for experienced investors.

Annuities

Unlike traditional investments, annuities are policies sold by insurance companies usually in retirement planning. By buying an annuity through paying in instalments over time or in a lump sum you acquire “income”. The income, made up of interest, capital gains and transfer of capital from annuitants who died before they should have is delivered in regular deposits. This often involves sales charges, annual fees and withdrawal penalties.

Cryptocurrencies

Cryptocurrencies are digital money that exist on a particular network or blockchain. Investors can directly trade cryptocurrency online without any role played by banks as intermediaries. Cryptocurrency currently remains largely speculative with a volatile market. Security concerns and regulatory uncertainties loom large on the crypto market space.

Commodities

These include wheat, coffee beans, sugar cane livestock stock (beef), gasoline petroleum lumber logs crude oils etc.. They can also be precious metals such as gold among others too. Commodities could be bought directly by one investor through use of a commodities-focused ETF or mutual fund or even using futures contracts; they may also serve as suitable means of diversification for more seasoned investors.

Metals

Gold is widely loved among many traders making it one of the favorite commodities. You can also invest in precious metals via purchasing shares in precious metal exchange traded funds (ETFs) or mutual funds but other ways include purchasing gold bullions coins from reputable dealerships alongside other precious metal varieties purchased by the ounce bar etc..

Real Estate

Also, apart from stocks, real estate is an option for diversification. This can be done the traditional way of buying properties or using Real Estate Investment Trusts (REIT’s). Public REITs shares are available on stock exchanges or can be bought via mutual fund or ETF focused on this area. However, Private REITS may also be found though they usually require you to hold an accredited investor status.

Farmland

Another way to diversify is through farmland investments. Platforms like AcreTrader and FarmTogether offer opportunities to invest in farmland online without having to farm it yourself. Also, there are special farmland ETFs and funds which can provide diversified exposure.

Know the Risks

All your money is at risk irrespective of what you decide to invest in. Some investment options such as cryptocurrencies are riskier compared to others. Market ups and downs are normal occurrences. According to Investopedia bear market means that stock market has declined by more than 20% from recent highs while bull market indicates a rise in stock prices meaning that your choices have better chances of being successful for a while however when is not known yet.. Diversify your portfolio to mitigate some risks but it will never be perfect unless your money sits in savings account only.

Investment, despite its associated risks, remains one of the most effective ways for people who want their wealth grow faster and faster every day until they die from old age[1]. There’s great potential for higher returns than those offered by a savings account.[2] If you begin investing at an early stage, you will have lots of time ahead which will give you maximum benefit due to growth opportunity.

Ways to Invest Do-It-Yourself

While you can invest through financial institutions or advisors, there are also plenty of do-it-yourself (DIY) options available, like investment apps.

To choose the best approach, you should first clarify your investment goals, what you want to invest in, your investment timeline, and your budget. This will help you make informed decisions as you explore different DIY investment methods. Popular low-cost options include robo-advisors and online brokers.

Robo-Advisors

Automated Investing – Robo-advisors

Robo-advisors are platforms that utilize technology and algorithms to automate your investments. Generally, they are more affordable than actively-managed, full-service portfolios, with some platforms even offering services without any management fees.

However, the trade-off for lower costs is minimal to no human interaction. If personalized service and advice are important to you, a robo-advisor might not meet your needs.

Some well-known robo-advisors include Betterment, Wealthfront, and SoFi Automated Investing.

Online Brokers

Electronic Brokers

Online brokers provide another low-cost alternative to traditional brokerages, often featuring low account minimums and little to no fees. These accounts are typically self-managed which helps keep costs down.

However not all online brokerage accounts offer the services of human financial advisors. This means no face-to-face assistance if desired by the customer so ensure that it provides this feature before choosing it for use.

There are several popular online brokers for self-managed accounts such as Fidelity Investments TD Ameritrade Charles Schwab Interactive Broker amongst others. Other cost-effective options include Acorns Robinhood Public.

Investing Apps

Investing apps bring the power of investing right to your smartphone. However with many options available making the right choice can be confusing.

To make a decision go back over your checklist concerning investing:

• What are your investment goals?

• What do you want to invest in?

• What is your ideal timeline for returns?

• What is your budget?

If you’re unsure where to start, consider checking out recommended investing apps for different types of investors.

How to Get Started

If you’re ready to start investing, it’s a good idea to take these preliminary steps:

1. Define Your Investment Goals

Are you investing for college, retirement, or another significant expense? Understanding your goals will help you stay focused, even during market fluctuations.

2. Decide How Much to Invest

Whether you plan to invest a lump sum or a regular amount, you first need to determine how much you can afford. Assess your budget and savings to decide on an amount that suits your financial situation.

3. Determine Your Risk Tolerance

Are you comfortable with high-risk investments for potentially higher returns, or do you prefer a safer, lower-risk strategy? Knowing your risk tolerance is crucial for making informed investment choices.

4. Identify Your Investing Style

Some investors prefer active trading, frequently buying and selling assets while others take a passive approach by investing in index funds as well as mutual funds and ETFs. Your tools and apps depend on this style of investment.

Diversify Your Portfolio

Rather than putting all your money into a single successful company consider spreading your investments across various asset classes to reduce risk. Besides stocks one could also venture into bonds ETFs mutual funds or alternative assets such as commodities.

Understanding Investment Costs

Before beginning it is important research the costs associated with investing in order not be caught off guard by unexpected expenses. Account minimums fees commissions are the key points of consideration here.

Cost of Shares: The cost of buying a full share of some stocks, especially in large tech companies, can be very high. If you have limited money, consider a broker that lets you buy partial shares.

Fees and Commissions: Be cautious with fees such as expense ratios and brokerage fees which may differ. Thoroughly research these fees before committing your money to any investment.

Mutual Funds: Minimum investments required for some mutual funds range from $500 to $3,000. Also, watch out for sales charges or “loads” that can be as much as 5% of your investment.

Investing in Different Assets

Stocks: A brokerage account is necessary whether it is done through robo-advisors, online brokers or full-service brokers. Compare the fees and commissions before making a choice about the platform.

Mutual Funds: Firms like Vanguard or Fidelity or an online brokerage offering wide number of funds can be used to invest.

ETFs: Like stock ETFs can be bought and sold on a brokerage account. Do your homework regarding the underlying assets and charges prior to investing.

Index Funds: These are index based mutual funds or exchange traded funds (ETFs) such as S&P 500 Index fund. You will need a brokerage account to access them though it is important to research fund performance along with fees.

Options: Options are complex financial instruments best suited for experienced traders. To start trading options, you’ll likely require a margin account and approval.

Farmland: Sites like FarmTogether allow investors to profit from crop sales, capital appreciation and rental payments without owning/running their own farm, by investing in farmlands.

Cryptocurrency: Open an account with trusted cryptocurrencies exchanges like Coinbase; Gemini; Kraken among others; critically look at diligence issues particularly security matters

Gold: Physical gold or gold ETFs and mutual funds can be invested into through your brokerage account. Some popular options are SPDR Gold Shares (GLD) and iShares Gold Trust (IAU).