There are many ways to invest smartly for the future. Learn exactly what you should do and what to avoid for the best investment decisions.
Investing at its most basic level is very simple. The idea is to make money work for the investor, rather than the investor working for the money. This may sound like a simple concept, but it is an important one because of the limitations that everyone faces. Without investing, most people can only earn money by working. If they want more money, they have to work more hours or find a higher-paying job. At some point, they are going to hit a wall, and their income will level off simply because they cannot work 24 hours a day. That is where investing comes in.
Investing allows an individual to continue earning money 24 hours a day, seven days a week and 365 days a year. It does not matter whether they are working at their day job, mowing their lawn or simply doing nothing. In other words, investing maximizes an individual’s earning potential.
Common misconceptions about investing
There are many misconceptions about investing, and unfortunately, they often discourage people from investing their money. Instead, they simply place it in a savings account and earn a pitiful return or worse yet; they stick their savings under a mattress. One common misconception is that investing is gambling. Nothing could be farther from the truth, but many people see it this way because some investors “gamble” by investing their money recklessly without doing proper due diligence. A true investor always performs a thorough analysis and only risks their capital when there is a reasonable expectation of earning a profit.
Reasons to invest
There are many different reasons to invest, but they all boil down to one thing: making more money. This is not about greed; at least, it is not for most people. Investing is becoming a necessity because without a healthy investment portfolio, many individuals will not be able to maintain their current lifestyle once they retire. Why? Because the days of working the same job for 30 years and retiring on a fat pension are coming to an end, and the burden of planning for retirement is shifting away from the state and onto the individual. This is happening because governments around the world are tightening their belts, leaving the future of many pension programs up in the air. This makes the outlook grim for those who do not prepare. Investing allows individuals to take control of their own future and ensure financial stability in their retirement years.
Good investing starts with skepticism and common sense. Get-rich-quick schemes are not real investing but gambling. The buyer beware principle applies the same way to investing as it does when making other purchases. If something sounds too good to be true, it probably is. Leave the risky ventures to those who have the money to lose. Smaller investors should stick with established and reputable investments.
Some good diversified investments
Apart from avoiding dangerous investments, prudent investing centers on diversity. There are several good ways to do this:
Mutual funds are perhaps the best-known investment vehicle. Basically, they work by pooling money from different investors under active management. Those in charge of the fund will then invest it in whatever types of investments the fund is set up for. This can range from the very high to low risk. They are popular in part because the ease in which investments can be made once an account is open and the thought of having one’s money under constant management.
Exchange traded funds (ETFs) are somewhat like a mutual fund in that they are a pool of money from different investors. However, they have some important differences. While mutual funds are under constant management and will try to beat the market, ETFs are designed simply to follow a market or index (through a basket of investments that will generally track it very closely). This could be anything from the S&P 500 to commodity markets. The main advantage of ETFs is that they require little active management and thus have lower fees than mutual funds. In addition, they can be bought and sold easily just like a stock, and give the investor greater control over when capital gains taxes taken. The drawback is that investor cannot hope to do better than the markets, although they will not do worse than them either.
Real estate investment trusts (REITs) are for those who would like to be invested in property but not all the responsibilities that come with managing it. These funds also pool money but in this case invest it in property. While it is generally commercial property, there are REITs for all kinds of property. By law, they must pay out most of their gains annually.
All of these instruments offer small investors great ways to diversify. However, they still need to be chosen very carefully since some are much better than others. In addition, follow the principle of not putting all one’s eggs in one basket. For example, if investing in mutual funds, choose funds that include different investment categories such a large and small capital stocks.
Over time, prudence and patience with investments can turn them into a steady income that will give one a more secure future. For most people, this is the best way to really increase their net worth for those who have the patience.