If you’re new to investing, you may think you need a lot of money to invest. Or that the stock market is too volatile to make money. Or even that you can only invest with the help of a financial professional.
These and other misconceptions can keep you from getting started. The good news is, understanding a few basic concepts can give you the confidence you need to begin.
Essentially, investing is a long-term strategy to help you grow your money and pursue longer-term goals like paying for a down payment on a new house and funding retirement.
Since saving and investing both involve putting money away for the future, you may be wondering how they’re different. A savings account gives you easier access to your money, but it’s a lower risk/lower reward option. With investing, you accept more risk in exchange for potentially greater returns over time.
Read more about the difference between saving and investing.
Investing’s key ingredient is compounding, which occurs when you reinvest the investment’s earnings to potentially generate more earnings.
Consider this hypothetical example: Let’s say you invest $10,000 when you’re 25. With a static 5% rate of return on that investment over a period of 40 years, compounded annually, you’ll potentially have $70,400 at age 65.
The earlier you start investing, the longer your investments have to generate more earnings, which generally leads to a greater impact.
Take a closer look at compounding in action.
There are a lot of choices when it comes to investing your money. The most common investment vehicles are stocks, bonds, mutual funds and exchange-traded funds (ETFs).
Get more details on on the risks and returns of these types of investments in your portfolio.
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An investment strategy outlines how you diversify your money among various investment vehicles. Diversification in investing is important because it may reduce the risk associated with any one type of investment. However, diversification and asset allocation do not guarantee returns or protect against losses.
Your investment strategy should be guided by four things:
Keep in mind that your investment strategy should evolve throughout your life. Consider taking on more risk when you’re younger, since you have more time to recover from potential losses. As you get older, however, you may want to lower your risk in preparation for retirement.
Just as with investing vehicles, you have choices when it comes to investment accounts; what’s right for you depends on what you’re looking for. Here are a few to consider:
Depending on your goals and funds available to invest, other options include 529 education plans, health savings account (HSA) plans, individual retirement accounts (IRAs), brokerage accounts and more.
Want more details on your investment account options? Take a deeper dive into how to start investing.
Investing can seem intimidating at first but understanding these basic concepts can help you begin your journey on the right foot.
Ready to begin? Learn how you can start investing your way today.