Why should I invest? What do I invest in? How much should I invest? Where do I invest? All of these are common questions surrounding investing. According to the Survey of Consumer Finances, almost half of American households had no savings in retirement accounts. I believe the lack of financial knowledge paired with the overwhelming feeling of investing in the “wrong” thing is what’s holding Americans back. With enough knowledge and support, you can achieve your money goals.
What to Invest in
You can invest in stocks, mutual funds, bonds, annuities, exchange-traded funds (ETFs), and money market funds. All these investments can produce different outcomes. Some are riskier than others while some may produce a safer return. It is important for the consumer to have a general idea of what each does so you can make the best decision for your goals.
Stocks
Stocks are securities that give the investor a share of ownership in the company. The risk in buying singles stocks is that you are relying on a single company to do well and grow. There is always a risk that one decision could impact the stock in a positive or negative way. Also keep in mind the fees associated with buying and selling single stocks. If you buy and sell stocks through a broker, there will also be fees associated as well.
Mutual Funds
A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. Mutual funds consist of multiple companies in one fund. If you invest in a technology mutual fund, it will consist of technology companies. This fund may have 20 companies, or it could have thousands. The idea is that unlike single stocks, there is more diversity.
Bonds
A bond is like an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a period of time. You agree to give the borrower money in return for a specific rate of return in an amount of time.
Annuities
An annuity is a contract between you and an insurance company that requires the insurer to make payments to you. You purchase an annuity by making either a single payment or a series of payments. You then are supposed to receive a payout as one lump-sum or as a series of payments over time. Be mindful that you are giving money to an insurance company that is taking that money and investing it for you. If you agree to getting a 6% return on your money, they may invest it and get 10% and keep the difference on your money.
Exchange-Traded Funds (ETFs)
Like mutual funds, ETFs offer investors a way invest in a fund that makes investments in stocks, bonds, or other assets. Unlike mutual funds, ETF shares are traded on a national stock exchange and at market prices that may or may not be the same as the net asset value (“NAV”) of the shares, that is, the value of the ETF’s assets minus its liabilities divided by the number of shares outstanding.
Money Market Funds
Money market funds are a type of mutual fund developed in the 1970s as an option for investors to purchase a pool of securities that generally provided higher returns than interest-bearing bank accounts. The return won’t be as high as other investment vehicles, but is comparable to High Yield savings accounts. It is a safe way to park money and get a better return than your basic savings account.
Bottom Line
The younger you start investing, the better. If a 25-year-old invests $300 a month till they are 65 years old, they will have $1 million dollars. If you wait just 10 years to start at 35, you will have to invest $700 a month to get the same million by 65 years old. You will end up investing more money than if you let compounding do the heavy lifting.
Understanding each investment vehicle is the first step in making the best decision for you. Always look at fees and commissions associated with investing in these different vehicles. Once you have all the information as well as your financial goals, you can then make the best decision for you to achieve your money goals.