So you’re interested in investing. Maybe you already know why and what you want out of it, or maybe you’re just curious about what it means. In any case, if we want to talk about investing, there’s a lot to cover. This article is a first round of heavy-fire questions and answers to clear up a few things.
What is investing?
Short and overly simplified answer: it’s buying products that will increase in value which you can sell later.
Why should I invest?
Because there’s a good chance that any money you have saved will lose its buying power over time. At the very least, you should have your money in a savings account so that you get a bit of interest for it each year. But even that isn’t enough to offset inflation in most cases. If you aren’t investing, you’re probably losing money because of inflation.
What part about investing means I get more money?
That’s called the rate of return or RoR. The higher that is in the positive, the better it is for your money and you. The stock market provides an average 7% return. If you get to around 10–12%, you’re golden.
What’s the most important thing to know about investing?
When you do it is a lot more important than how you do it. Let’s say you want to invest for retirement, and in an ideal situation you’ll have a 12% RoR. If you start at 25 and retire at 65, then you’ll have 40 years to invest. If you choose to invest about $100 per month, you’ll have about $1.000.000 when you retire.
If we take the same conditions, but you start at 35, you’ll only have $300.000. You’ve lost more than two-thirds of how much you can earn through investing because of timing alone.
How much should I invest and when should I start?
You’ll find plenty of opinions on this, ranging from 10%, 25%, to 35% of your income before taxes. The only thing you should keep in mind is that the more you invest, the better.
However, if you don’t have enough savings for an emergency fund that covers at least 3 months of living expenses, it’s best not to start investing just yet. Focus on having some savings before anything else.
What can I invest in?
There are quite a few options. We call these options assets, and they can take the form of bonds, mutual funds, stocks, precious metals, and real estate – these are some of the main ones.
How can I minimize the chance of losing money?
By diversifying assets. In most cases, everyone who invests is wrong most of the time, and that goes even for Warren Buffet. The way to offset that is by investing in different assets, so if one loses money, another gains it back.
What’s a portfolio?
A portfolio refers to the grouping of assets you’ve invested in, meaning the bonds, stocks and so on, all lumped into one.
Are there strategies for diversifying assets? There are? Which ones?
Luckily some people have already done the work for us and figured out a few good strategies. Here are some of them:
Although timing is essential, investing isn’t something easy enough to do without at least a bit of research. The best first step for anyone is to become financially literate as soon as possible. A few recommendations on that front are some of the following books: I Will Teach You To Be Rich by Ramit Sethi, The Intelligent Investor by Benjamin Graham, or Money, Master the Game by Tony Robbins.