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For many of us, investing our hard-earned money is scary. We don’t really know how to do it or do it well.
For a lot of us, we remember hearing horror stories about when the “Dot Com” bubble burst leaving many investors bankrupt. For others, fear from horror stories of retirement plans all tied up in Enron stocks that caused life savings to disappear in a flash when that entity went belly up.
You have nothing to fear. By taking a few simple steps to set up your portfolio and invest wisely, you can begin to squirrel away a sizable nest egg for the future.
The big thing you need to realize about investing is that you don’t have to wait until you’re nearing retirement age to begin capitalizing on these tips.
1. Don’t Panic
If you’re one to equate investing with gambling, you can stop panicking. There’s much less risk when it comes to smart investing than there is when you sidle up to the black jack tables in Vegas.
Due to this fear of losing everything, many Americans let themselves become paralyzed and never attempt to start an investment plan.
It’s like the old saying that you miss 100% of the shots you don’t take—if you never get started in investing, you’ll never earn any money to put away when you need it. So, the first thing you need to focus on is getting over that fear and making the leap into the investment field.
2. Don’t Wait Until It Is Too Late
Another big problem for too many Americans is that we wait until the absolute last minute to do anything. Procrastination can be downright dangerous when it comes to investment.
If you wait until it’s time to retire to start making investments, chances are you won’t have enough of a nest egg set aside to retire when you originally planned.
The bottom line is that social security is not a given and the likelihood it’ll be around in forty years when the average millennial retires is starting to slip. Instead, create a retirement strategy as early as possible. The issue being the sheer amount of money that is lost if you don’t start early.
A report by Rutgers University recently pointed out the long-term losses when you wait too long to invest.
As they show, a person who starts investing at age 25 and begins setting aside $50 from each weekly paycheck will see a total investment of $104,000 blossom into approximately $430,000 after 40 years. (This is assuming a modest 6% return on investment.)
However, if the same person waits until they are 45 to start and only sets aside $50 a week for 20 years, they will only invest half of that amount ($52,000) and it will only have time to grow into about $100,000.
That means the person who waited 20 years to begin lost out on over $300,000 that could have gone towards their retirement.
3. Play It Safe
Many people have these wild ideas about the stock market and investments thinking they’ll hit it big like they’re playing the lottery. In reality, risky investments more often than not can cause you to lose everything.
The better idea is to slowly add to your total investment portfolio gradually rather than put it all in at once. And when you do invest, go with the safer investment options.
Sure, these are going to net you a smaller amount than those flashy, riskier investments. But they’re going to carry less risk with them and keep you from getting wiped out if the company tanks.
If you’re totally unaware of what types of risk come with the different investment types, then you need to ask a financial planner for the best options for your investment needs. And that leads us to one of the biggest of the basic investing tips…
4. Get Educated
There are literally hundreds of different terms that you need to familiarize yourself with if you’re going to do serious long-term financial planning.
If you’ve never heard of “annualized rate of return,” “contingent deferred sales charge” or “liquidity” then you really need to educate yourself about the different types of investments.
One way to do this is to read as much as you can on the subject. Instead of jumping straight to the sports page of the newspaper, instead spend time looking at the business page (or start reading The Wall Street Journal and other investment papers).
Other good reading choices are books such as The Intelligent Investor by Benjamin Graham or The Little Book of Common Sense Investing by John Bogle. Morgan Ranstrom, a financial planner, has stated that “reading five books on successful personal finance strategies or leadership skills will make you smarter over the course of a few months”.
One such option is to subscribe to Leader Box, a monthly subscription service that will send you personal growth reading materials.
5. Make A Game of It
Another way to learn more about investing is to play around with tracking companies. As a way of getting your feet wet, pick one company and track it over a few weeks to see what your hypothetical investment would be up to.
This gets you into the habit of checking on your stocks before you actually take the plunge and start putting in real money. You can also do this using a digital game such as Investopedia’s Stock Market Simulator that gives you real time practice at making investments.
6. Figure Out Your Comfort Level
Part of that last tip was focused on making sure your investments are safe and risk-free. But anyone who has ever worked in investments will tell you that there is never a 100% risk free investment. But what you need to decide early on is how much risk you are willing to take on.
If you’re younger (let’s say your 20s or early 30s), then you can take a few more risks. If you lose a little money early on, you obviously have more time to recoup your losses and get that investment back.
But if you’re investing in your 40s, 50s, or even later, you want to play it safe and not take on investments that could lose you a lot of money simply because you won’t have that much time left to reinvest.
Part of determining how much money you can risk or “play with” comes with sitting down and looking at your budget.
First, determine how much money you can set aside each pay period towards your investment plan. Then, determine just how much money you feel that you’ve got to have when you retire.
This will help you get a better idea of how much you’ll need to earn in your investments and helps determine how much risk you can afford. You can get guidance through this important part by working closely with a financial planning expert.
7. Have Your Boss Pay for It
Ok, not all of it. But many companies and employers offer programs like a 401(k) plan. If that’s the case with your boss, take it!
In some cases, these funds are investments of pre-tax dollars. That means the money is placed into the plan before you pay taxes on it. So not only are you getting the investment money to hopefully grow your investment, but you don’t have to pay taxes on it!
But wait, the savings don’t stop there. Many employers will offer a 50% match on the investment. That means that for every dollar you contribute to the plan, they match it with fifty cents. For instance, if you invest $100 in your plan, they will meet you with $50 added in.
You won’t find a stock or similar investment that can give you that kind of a return on your money.
If you’re not sure about what options are available to you from your company, be sure to talk to the accounting department and find out how your own company can help pay for your investments. After all, it’s free money!
8. Stick with What You Know
When you start investing, you’ll be able to invest in a variety of companies and funds. But if you want to play it safe, stick with the ones that you know.
Invest in businesses that offer goods or services you’re familiar with. If you try buying into something because it sounds good or it seems to be doing well, you may not understand the nuances of the business that can cause the stock prices to fluctuate.
And worse yet, you could get caught up in some kind of “fad bubble” that could easily burst leaving you in the cold.
9. Research the Companies
If you aren’t sure if a company is a high risk or not, then you need to do your research. This doesn’t mean just talking to other people or reading what other people think of it. Instead, actually look at the company’s balance sheets to see what they have in terms of assets and debts.
If a company is harboring a lot of debt, it may still be a good investment, but you need to think twice about making it. A high-debt business won’t be able to generate that much capital to move the company forward and “grow” the business with fresh investments.
10. Bonds May Not Be the Way to Go
In the past, many people have put a lot of their money into bonds because of the relatively low risk. However, interest rates on these are notoriously low and aren’t getting any better.
Instead, you may want to keep some of your money in bonds but use a little more to “play around” with high-yielding stocks.
If you do choose to go this route, make sure you keep your eyes peeled on ledger sheets to make sure the cash flow is steady or it may be time to bail out and find something else before it’s too late.
11. Be Careful with Mutual Funds
If you have a lot of investments in mutual funds, you may have an excellent business plan in mind. But once you start looking into the individual stocks in those mutual funds, you may find there’s a lot of crossover and you may have most of your money put into just a few different stocks.
That’s not a good idea because it falls into the old adage of “don’t keep your eggs in one basket.” By diversifying, you run less risk of losing it all. But with mutual funds, you may not be as diversified as you think that you are.
If you don’t believe us, just check out the history of the 2002 market when many mutual funds were buying up the same “dot coms” that led to financial disaster for some investors.
If you’re concerned about your mutual funds, there are tools available that can help you go deeper into your analysis of those funds.
12. Use Your Dividends Wisely
Many people will try to diversify their stocks by selling some and buying new ones. This is fine, but a better avenue would be to use your dividends to do this instead.
Take your dividends in cash and then use it to buy stocks in different companies that are in fields you may not have as much invested in. In this way, you can add new stocks to your portfolio and you won’t have the tax bill from selling your old stocks.
13. Hold Back Some Cash
Another big tip to follow is to never put ALL of your money into investments. After you pay all of your essential bills and expenses, any money you have left over can be invested. But if you put it all into investments, you’re essentially taking a gamble with that money.
Instead of putting it all into investments, keep back a small amount of money each month into a simple savings account. This way, if the stock market drops significantly, it won’t wipe out all of your money.
14. Take Advantage of Peer-to-Peer Lending
If you have the opportunity, take advantage of newer opportunities like Prosper and the Lending Club. In this case, you basically act as if you are a bank.
You can loan money in small increments to people whose goals and business plans you believe in. You can split these loans into small increments—one loan of $25 or another of $50. But when you make dozens of these loans (or even hundreds or thousands), then you’re loaning out your own money at interest.
In this case, you can usually get a minimum of 6% return on your investment and this will add up over time. (Higher rates of return are also not unheard of with riskier loans taking on higher rates of interest.) Usually, you can also get started with these lending platforms with about $1,000.
15. Real Estate Can Be a Gold Mine or a Money Pit
Many people will recommend that an investment property such as a rental home is an awesome way to make money…and they’re right, up to a point.
If you’re good with making home repairs on your own, then it can be a great way to make money because you’re acting as landlord while not having to pay to outsource your repair work. However, if you have to outsource this work, it probably won’t make much sense to make such an investment.
Another option might be to look at real estate notes. In this situation, one person buys a cluster of real estate properties. Then, several investors can put money into these properties that the original buyer manages.
That manager will then pay the investors dividends from those investments. In this way, you don’t have to be a handyman or handle problems with tenants—that’s all left up to the original manager. But you can still reap the rewards of the money you put into the properties.
16. Spend Less Than You Earn
This one sounds like a no-brainer but hear us out. You’ll never be able to grow your wealth and invest for the future if you don’t live within your means. In order to help this along, you have to do two things.
First, spending less is important. Look closely at your budget and decide where you can cut corners, even if it is just cutting out that daily Starbucks drink on the way to work.
(By the way, if you do this, that will save you about $100-$150 a month that you can then use to invest and grow your money.) Websites such as FrugalForLess.com can help tremendously in this effort.
Second, find ways to earn more money. This can be everything from taking on a second job while you can, to earning passive income online. It seems that everyone today has some kind of “side hustle” to earn money, so you might want to look into this as well.
17. Choose One of the Big Four
If you’re just starting out when it comes to investing, you really can’t go wrong with one of the four major types of investments: exchange-traded funds (ETFS), mutual funds, Roth IRAs, and certificates of deposit (CDs).
An ETF is traded the same way as individual stocks are, so you’re bringing in some of the “old familiarity” with this option. But this is a fund in that it is a collection, sometimes called a basket, of different stocks and bonds in a single grouping.
These can be thousands of different stocks, all bound together into one fund, which gives you a diversity of investments at a low cost.
This is very similar to mutual funds, but there are two big differences. ETFs are traded throughout the day while mutual funds only trade at the end of the day when the prices have become fixed. Furthermore, ETFs have lower brokerage and management fees than mutual funds.
Mutual funds often set a high limit, such as a $1000 minimum, to begin investing. With Roth IRAs, think of them as a tax-free savings account. You set aside money each month before taxes, so you don’t have to pay taxes on that income and you don’t have to pay taxes on the money that you earn from the interest.
This works wonders in creating a nest egg if you’re willing to commit to making monthly installments to the account. Finally, you can always go with the safest of investments, the certificate of deposit (CD).
You place, for instance, $1000 in a one-year CD with absolutely no risk. You cannot touch that $1000 without paying a penalty, but at the end of the year, you receive a relatively low 2% interest. It’s because the risk is almost non-existent that the reward is so low, but these are still great investments for those with a low risk threshold.
Unless you have a winning lottery ticket ferreted away that you plan on bringing out when you hit 65, chances are you’re going to have to work a little bit each year to get yourself ready for retirement.
But if you’re smart with your investments and follow these tips, you can safely increase your money creating a nest egg that’ll give you a good discretionary income along the way or a sizable chunk of cash when you’re ready to enjoy your golden years.