If you’re like me, you made it all the way through college and well into adulthood without ever taking a class on personal finance. It doesn’t matter if money is on your mind when you are busy with work, school, or reveling in the joys of parenthood, you don’t always have the free time you need to familiarize yourself with the best ways to grow, save, or borrow -- even if you wanted to.
If that’s the case, I’ve got some good news – we’ve done the work so you don’t have to!
Today we we're talking about investing.
What is investing?
If you’ve ever heard the phrase “buy low, sell high” then you are familiar with the basics of investing! The goal with investment is to make money by buying something at a low price and selling it at a higher price than what you paid for it. Investing is typically a way to grow wealth, usually over a long period of time.
Words associated with investing:
- Appreciate: rise in value or price
- Asset: a useful or valuable thing, person, or quality.
- Capital gain: a profit from the sale of property or an investment.
- Dividends: a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits or reserves.
What is the goal of investing?
There are two main goals of investing:
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Capital Gain:
Make money by selling your assets (for example, stocks, real estate, art, etc.) when they increase enough in value.
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Income Investing:
Make money through assets by holding on to them instead of selling them. This is often done by purchasing bonds, or stocks that pay dividends (because dividends are paid quarterly to shareholders, the longer you hold on to that asset the more money you have the chance to make), and of course real estate as well (for example, collecting rental income on a property you own).
Why is investing important?
Investing is generally regarded as the best way to grow wealth. There is a popular phrase in the finance world known as the “rate of return”. The rate of return measures the amount of money you have gained or lost over time. Investing gives you the highest rate of return. It allows you to generate a much higher return than what you would make from keeping all your money in a savings account at the bank.
Did you know? Keeping your money in savings means you lose money every year? Often (like now!) savings rates don’t cover the cost of annual inflation (inflation is the rise in the price of goods and services over time, therefore reducing the purchase power of your money).
What types of investment options are there? There are numerous investment types, but the most common ones are:
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Stocks
Both public and private companies sell their stock to raise money to fund their operations. When you buy stocks, you are buying an ownership piece of the company, which in turn gives you a portion of the company’s profits (or losses).
Average annual stock market return over the last fifty years: 10%
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Bonds
Bonds are a way for companies (or governments) to borrow money. When you buy a bond, you are essentially giving a loan to the company (or government) which they will pay back with interest. Most bond payments are “fixed” and pay a set amount to you over time so they are more predictable than stocks which can go up or down in value. Bonds are different from stocks because you don’t own a portion of the company, which means you won’t benefit from their gains, but you won’t be hurt by their losses either, as long as they remain current on their loan payments.
Average Annual Bond Return: 5-6%
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Commodities
Investments in agriculture, energy, and metals usually through purchasing of a type of stock derivative called “futures” and “options.” This investment type is a bit more complicated for a first-time investor.
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Real Estate
You can invest in real estate by buying a home, building, or land either directly or through an investment vehicle such as a Real Estate Investment Trust (REIT).
Of course, here at Worthy we're fans of private market and alternative investments – particularly those that have a social impact such as investing in young, growing private companies or sustainable energy as it is important to have a diverse investment portfolio.
Are there downsides to investing?
Yes, investing comes with risks. Stock markets can be volatile or governments and corporations can default on their debts, so there's a potential for you to lose money on your investments. In addition, investing can require you to know more about finance, asset classes, and the market than you may already know
What is the best strategy for investment?
The best strategy for investing is to:
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Invest early
The earlier you start investing the longer you have to grow your wealth
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Invest for as long as you can
Same logic as #1, longer investments have more time to grow wealth.
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Invest in different assets
A.K.A. “diversification” and is a way to lower your risk of losing money as you invest across different asset classes that don’t move in the same direction (for example when bond rates rise, stocks usually go down).
