If you’re new to investing money, it can be difficult to know where to start. After all, with so many avenues for investment, not to mention a dizzying array of business-related terms and lingo, a little help can go a long way. Keep reading to learn about a few key tips to invest your money wisely, and grow your wealth in 2020.
It pays (literally) to understand that investing is very often a long-term process, rather than a get rich quick scheme. A wise investor realizes that his or her investment should grow over time, as a company grows. When you buy stock in a company, you’re doing so under the belief that it will continue to expand, diversify and branch out to become more lucrative. Many first-timers believe it’s simply a matter of buying and selling within the space of a few months to maximize their cash out.
It’s also key to remember that compounding interest can produce a nice revenue stream over time. Holding a single stock over a very long period of time is considered the traditional example of this. Both interest and capital gains can be reinvested to produce more earnings as time goes by. That being said, there are a few places you can invest your money, but let’s begin with the most obvious one.
The Stock Market
More experienced investors look to the stock market for great investments, as it’s considered the most common avenue to put money in, and one of the most transparent. You can see the value of your stock in real time, gauge where the company is headed, and take appropriate steps as you see fit.
Owning a portion of a company means you will be paid profit dividends based on the number of stocks you actually own. As the company grows in profitability and size, so too does the individual price of each of your stocks. If you decide to sell at a later date, you can cash out with a windfall.
Those just getting into investing can choose to go the route of mutual funds – a collection of individual stocks managed by a mutual fund expert. This shopping cart-style purchase means you’ll have a more diverse collection of stocks in your portfolio.
Mutual Fund investors also have a few key advantages, such as having access to asset classes which allow them to invest in international markets, and the ability to zero in on particular investment factors such as growth and low volatility. There is a catch, however. Mutual Funds require you to pay a percentage-based fee to a manager, which can hamper the possibility of beating a market, and reduce your earnings.
You’ll often hear investment experts touting the benefits of investing in physical commodities such as gold or silver. The key argument is that they retain their inherent value far better during difficult economic periods, such as a recession. They also fight off inflation quite well, and in some cases benefit directly from it. As the prices for goods and services go up, so too do the prices of commodities, which is good news if you’re a potential seller.
The downsides include a huge volatility risk, making them difficult for inexperienced investors to navigate. One study by the PIMCO Commodity RealReturn (PCRDX) found that commodities were twice as volatile as S&P 500 stocks, and four times as volatile as bonds. Also, physical commodities generate no extra income on their own, and should be seen as a fallback measure when rough economic conditions do a number on stocks and bonds. This is especially true as the Coronavirus pandemic has run its course, and is now on the decline. A recession of some sort is expected, making physical commodities more important than they were last year during the economic boom.
If you’re too intimidated by the prospect of putting your money into any of the above, you can always go the safe route – savings accounts. This low-risk solution offers a low return, so be mindful before going this route. While it’s always good to save money, it’s unwise to do so for the purpose of growing your existing wealth over time. Interest rates on savings accounts are notoriously low compared to what they were 40 years ago, and times have changed.
If you’re going to put your money into a savings account, do so with the knowledge that you’ll have a stockpile of cash to draw on at a later date, if you change your mind about investing. You’ll be in a good position to gauge how much money is acceptable to risk, while keeping enough left over for yourself.
To summarize, it’s recommended that fledgling investors put some money into the stock market to get their feet wet, and understand the nature of investing a little more. Trading in and out of stocks, while holding some for a few years can be a good teaching tool that will serve you well as you become more seasoned. If you end up losing money at the start, don’t fret. Most new investors do. Remember that real gain comes from long-term goals, not short-term attempts to strike it rich.
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