If you’re a newbie, here are the basics when it comes to your investment options.
As someone who considers herself still relatively young, I didn’t really think investing was “the thing” for me. I’ve just spent the past decade paying off my student loans, saving up enough money to buy a house, and am now thinking about starting a family, so the idea of taking money away from these endeavors and using a single penny to fund investments that I won’t need for at least another 30 years is somewhat comical and unrealistic.
But when I started envisioning the retirement I wanted to have, I realized both my husband and I had grand plans for our golden years that involved world travel, pampering ourselves and not having a single worry about money. The best thing about investing when you’re young is you have the advantage of compound interest — time is on your side.
Compound interest is what finally motivated us to get serious about investing and take a look at all the different options available to us.
Many have heard of the stock market, but few actually take the time to invest. The truth is you don’t have to be a stock market pro to invest a few hundred dollars in stocks. Anyone can get started by opening a low-cost brokerage account, like Ameritrade, E-Trade or Fidelity. You can then take any amount of money you have designated and select stocks to invest in.
Stocks are a small ownership on a company, so when you buy a company’s stock, you are essentially buying a very small ownership stake in that company. A lot of small-time investors simply choose stocks based on what kind of companies they like.
The pros of purchasing stocks are they typically have significant returns, meaning you can earn a lot of money off your original investment. I once knew a kid in high school who had invested all his birthday money since he was a little kid and was able to buy his first car in cash with the investments he had made. However, the cons of purchasing stocks are that they can be extremely risky. There can be a lot of ups and downs in the stock market and you have to be willing to weather the storms.
Bonds are considered much more stable than stocks, but their returns tend to be on a much smaller scale. A bond is essentially money you are loaning to a company or the government. With a bond, you assume the role of the bank and the lender must pay you back the money with interest — this is where you make your returns.
Mutual funds are a collection of stocks and bonds you invest in with a group of other investors that are managed by a third party on your behalf. Mutual funds are one of the most common types of investment vehicles and make it easy for the everyday man to get into investing. You are putting your trust (and money) in your experienced investment firm to manage your funds for you.
Similar to the ups and downs of the stock market, mutual funds can have big returns if you invest long term and aren’t squeamish about market fluctuations.
Gold has been around for a long time, but the recent rise of gold prices have pushed it back into the spotlight. A lot of people choose to invest in gold because they consider it a representation of wealth. During the economic crisis of 2009, gold was seen as one of the most stable investment sources. Many financial experts may recommend investing a very small portion of your investment portfolio in gold, but not much more than that.
While stocks and bonds and a lot of other investments are driven by the economy, there is no rationale to gold. It rises when it rises, and it falls when it falls, according to Bridget Mermel of Time. Gold is seen as unstable, unpredictable and weak. Among the list of investment choices, it doesn’t rank very high.
The Importance of Investing
There are lots of different investment options to choose from, and this is only a small sample. Any financial expert will tell you, when it comes to investing, it’s critical to diversify, diversify, diversify. While it can seem like a daunting task, remember to take it one step at a time to become knowledgeable.
Retirement may seem like it’s eons away, but you don’t want to find yourself at 60 years old, wondering if you’ll ever be able to afford to stop working. Equip yourself now with the tools you need to make solid investment decisions.
Written by Erika Torres