As you consider investing, the first couple of things to do are to pay down high-interest debt and to put away money for a rainy day. I recommend keeping 6-9 months of savings that will cover your expenses, just in case something happens. For savings above that, if your finances and risk tolerance allows, you should consider investing the money for growth, writes Ketu Desai. – @Siliconeer #Siliconeer #Business #Finance #Investments #Investing #WealthManagement @KetuDesai
You should invest for a number of reasons. First, if you keep your money in cash, due to inflation, your money will be worth less in the future than it is now. For example, a gallon of milk cost $2.68 in 1997, today it averages $3.30, a 23% increase!
In other words, your dollar will be able to buy you less in the future. Investing allows your money to grow at the rate of inflation or greater.
Second, investing allows your money to work for you and compound. With compound interest, you earn interest on the money you save and on the interest that money earns. Over time, even a small amount saved can add up to big money. If you saved a $100 now, and were able to earn 5% annually on it, in 10 years that $100 would be $162.89, in 20 years it would be $265.33, and in 30 years it would be $432.19.
What are Investment Options?
There are many investment options from real estate, to timber, wine, art, however, I will limit the scope of this article to liquid easily accessible options. First and foremost, it is important to note that investing involves risk, and you should be comfortable with the amount of risk you are taking before investing. It is also important to diversify your investments, meaning do not put all your eggs in one basket or in a single stock, bond, fund, etc. Diversify across various asset classes so you are less exposed to a single bad event causing you to lose all your money.
Stocks are often referred to as equities, and are essentially an ownership stake in a company. For instance, if you buy stock in Google, you are buying an ownership stake in the company. Many stocks pay dividends, which are periodic distributions to holders of the stock. Stocks are often volatile, and can be risky.
Bonds are debt of an entity. You can buy bonds of a country for instance, U.S. Treasuries, municipalities, or companies such as Apple debt. Bonds generally pay a coupon, which is an interest payment on a periodic basis, and return principal (the amount borrowed) at some point in the future. One of the biggest risks with bonds is interest rate risk. If interest rates go up, the value or price of the bond goes down. Many people view bonds as less risky securities.
Mutual funds pool money from many investors and invest the money in securities such as stocks, bonds, and short-term debt. They offer investors the ability to gain access to a diversified portfolio. Fees are an important consideration for mutual funds.
Exchange Traded Funds (ETFs), are similar to mutual funds, however, they are publicly traded and can be traded intraday. ETFs often have lower fees compared to mutual funds. There are thousands of mutual funds and ETFs, they can be very broad such as diversified portfolios, tracking an index such as the S&P 500 or Dow Jones, to very targeted aimed at a specific sector or market factor. It is critical to research the specific product before investing.
How to Invest?
There are a number of ways you can begin investing. One way is to do it yourself. To do this, you could open a brokerage account, preferably at one of the low-cost brokerages, where trades are below $10, and many ETFs and mutual funds can be traded for free. The simplest and perhaps cheapest way to begin is to buy broad market ETFs, such as an S&P 500 index fund, bond market index fund, etc. This will give you exposure to a broad range of stocks and bonds and at nearly no cost.
Depending on your age, timeline, and risk-tolerance you would size each position. A very generic starting point is to have 60% in equities and 40% in fixed income. Adjustments to this starting point are then made based on the factors above.
The second way to invest is to hire a financial advisor. Here again, there are many options such as going to a bank or working with an independent advisor. Factors to consider in making this decision are fees, not only how much, but are they flat, commission, other schemes.
Perhaps most importantly, what are the alignment of interests between you and your advisor? Is he or she also invested in these products? How is their compensation structure aligned? Are they trying to push other products? What are the conflicts?
This article is not meant to be all encompassing, but I hope it is a good starting point. Good Luck!
Interested readers can reach Ketu Desai by email firstname.lastname@example.org.