Let’s be honest: Investing is kind of scary.
The stock market itself is difficult to understand — you earn money by spending money? And it’s not even necessarily real money, but this virtual number that moves and shifts on a moment-to-moment basis?
Seriously, who thinks this is a good idea?
Well, as it turns out, just about every single financial professional — as well as the army of everyday people who’ve used the power of compound interest to fund major financial goals, like home ownership and retirement.
There’s a reason a 401(k) account is one of the most common workplace perks: You pretty much need to invest if you’re going to build a big enough nest egg to one day throw in the towel.
Investing is also one of the easiest ways to earn passive income — that is, making money without putting in any extra hours at work. Once you set up your investment portfolio, it takes relatively little management to see significant returns: The average investor has seen 10% growth annually over the last hundred years.
So what’s the best way to get started with your own investments? And what do you need to know before you take the big leap? Is it actually possible to start an investment portfolio from a smartphone app, and should you?
Hang on tight, Penny Hoarders. We’re going to dive into all of that and more.
Getting Started: What is Investing?
Before we dig into the nitty-gritty of how to get started on your own investments, let’s clarify some basic terms.
Investing is spending money on something — be it a share of a company on the stock market, a house, or a painting — in the hopes that its value will grow. If it does, the investor can later sell the item, also referred to as an asset, and earn a profit.
There are four main types of investments, which are also referred to as asset classes.
- Stocks, otherwise known as equity investments
- Fixed-income investments, like bonds
- Money market or cash equivalent investments
- Property, including real estate and other tangible assets
Stocks
These are probably what you think of when you think of the stock market: shares, or fractions of ownership, of publicly traded companies, which increase in value as the company performs well and earns a profit.
Shareholders are paid dividends when this occurs, but are, of course, also vulnerable to downswings in the market — and the possibility of the company performing poorly or even going out of business.
Mutual funds and ETFs, which are pre-built pools of investment options, are also grouped under this asset class, though they sometimes include bonds and other types of securities. (We’ll go into more detail on mutual funds and ETFs below.)
Fixed-Income Investments
These are investments that offer a prearranged, fixed interest rate and usually pay at regular intervals or after a set amount of time. Bonds are the most common example. When you purchase a government bond, specifically, you’re actually giving the government a loan, which it agrees to repay after a certain amount of time (the bond’s “maturity”) at a set interest rate.
Bonds are considered safer investments than stocks, which are more vulnerable to shifts in the market.
Money Market or Cash Equivalent Investments
These are highly liquid (meaning they can quickly be converted to cash), short-term investments, like CDs (certificates of deposit) or short-term debt securities, like U.S. Treasury bills. This asset class offers relatively little growth — meaning you aren’t likely to reap a big profit quickly — but also comes at a relatively low risk.
Property
It’s just what it sounds like: tangible, physical investments, like real estate or fine art, which can appreciate (read: grow) in value over time.
(Psst: depreciation is the opposite, when a tangible asset loses value over time. One of the biggest culprits? Cars, trucks or SUVs, which can lose as much as 10% of their value annually, according to Carfax.)
For the purposes of this post, we’re going to focus primarily on stock market investments, as these are the most accessible to — and rewarding for — average folks. But we’ll also briefly cover property investments, including bitcoin. (Yes, it’s still a thing — and yes, we know you’re curious!)
Why Should You Invest?
Chris Zuppa/The Penny Hoarder.
One thing we should make clear: Even the “safest” investment options do carry some risk. There’s no such thing as a sure investment.
For that reason, many savers feel a lot more comfortable stashing their cash in a low-interest savings account… or even under their mattress in the form of paper bills. But investing is one of the easiest ways to earn a passive income — and if you want to build serious wealth, the stock market is the surest-fire place to make it happen.
Malik S. Lee, a Certified Financial Planner and the founder of Atlanta-based Felton & Peel Wealth Management, understands why some people are reluctant to enter the market. But he also knows it’s imperative for meeting many common financial goals.
Maintain the Value of Your Money
In fact, if you take inflation into account, investing isn’t just a way to grow your money — it’s a necessary measure to maintain its current value.
According to Lee, inflation has historically averaged between 4-5%, and so over the course of 20 or 30 years, that can make a big difference.
“If you would like your money to spend the same way then that it’s spending today, you’ll need the power of the stock market,” Lee said.
Even a low-growth investment like a CD might actually net you a negative return, given today’s rate of inflation.
And, of course, it’s important to remember that investing is all about playing the long game. Yes, you’ll likely see some scary stock market headlines over the course of your investment career. But so long as you hold tight and don’t run for the hills, the overall odds are in your favor.
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