Investing is the process of putting money to work in assets like stocks, bonds, real estate and commodities in order to generate future returns and build wealth over time. For many beginners, investing may seem intimidating or reserved only for the wealthy. But the power of compounding returns and the wide array of investment options available today means investing is within reach for most people. Read on to learn what investing truly entails as well as practical steps anyone can take to start investing.
What Does Investing Mean?
At its core, investing simply means using money or capital to acquire assets you expect will provide income or appreciate in value down the road at a favorable return. Investments involve some risk, with the potential to earn outsized returns but also lose value. They require patience and a long-term outlook, as gains accumulate over years or decades through compounding. Virtually any vehicle that involves committing money or capital to earn future cash flows can be considered an investment.
Investment Goals And Motivations
People invest for many reasons, with goals ranging from securing retirement, building an education fund or generating present-day income. Core motivations include:
- Earn returns that outpace inflation to increase purchasing power over time.
- Generate recurring investment income through dividends, interest, rentals.
- Grow a specific future fund for a financial milestone like college or retirement.
- Build and preserve intergenerational wealth to transfer to heirs.
- Achieve financial freedom that allows pursuing passions or desired lifestyles.
- Understanding your “why” clarifies suitable investments and strategies to pursue.
Major Investment Asset Classes
While anything having the potential to generate favorable future returns is an “asset class”, stocks, bonds, real estate and cash equivalents are among the most common:
- Stocks – Equity shares representing ownership in corporations.
- Bonds – Debt investments in which you loan money to issuers.
- Real Estate – Property intended to generate rental income and/or capital appreciation.
- Cash Equivalents – Very liquid assets like money market funds, CDs and Treasury bills.
Within these major categories exist countless specific investment types, including mutual funds, ETFs, blue chip stocks, high-yield bonds, REITs and more. Assembling a mix of complementary asset classes is the foundation of building a solid portfolio.
Getting Started With Investing
With the fundamentals covered, how can you start putting money to work? Here are key actions beginners should take:
Know Your Goals
Clearly defining financial and lifestyle objectives focuses your efforts. Set specific timelines and target numbers to guide strategy.
Educate Yourself
Read investing books and articles, take online courses and learn investing lingo. Knowledge builds confidence and allows for assessing opportunities.
Pay Down High-Interest Debt
Credit card and personal loan debt diminish returns. Make eliminating high-interest debt a priority before substantial investing.
Start Saving Regularly
Commit to consistently saving a portion of your income. Automatic payroll deductions make this easy. Savings become your investing capital.
Choose Investment Accounts
Tax-advantaged accounts like 401(k)s and IRAs should be funded first before taxable brokerage accounts.
Build An Emergency Fund
A liquid cash buffer prevents tapping investments during emergencies or downturns. 3-6 months’ expenses are recommended. This is one way how tech industry professionals invest in real estate.
Select An Online Broker
Opening an account with a reputable online brokerage provides a platform to purchase investments and consolidate them.
Stay Disciplined And Be Patient
Don’t panic during market swings. Adhere to a long-term strategy through ups and downs. Compounding works over decades.
Review And Adjust
Review your portfolio allocation and performance regularly. Rebalance holdings or change investments as needed.
Enlist Help If Desired
If you find investing daunting, a financial advisor or robo-advisor can provide guidance or completely manage your money.
To Wrap Up
Investing can certainly seem intimidating, but breaking it down into approachable steps makes it far less formidable. Like any skill, it involves education and hands-on practice over time. Start small if needed, and let the power of compounding go to work. With patience and periodic review, investment accounts can grow impressively. The key is simply getting started. Your future self will thank you.
