Disclaimer: The purpose of this post is education, not advice. Make sure that you make your investing choices based on your specific goals and risk tolerance.
When you first start investing, it can feel like there are too many options, and not enough information. What are all these funds, stocks, ETFs, and strategies? What’s short-term vs. long-term investing? Which one is right for me? For many of us, how & where to invest money can seem like a question with an overwhelming number of answers.
On top of the confusion, the risk feels extreme, I could lose all of my money!
For me, I felt like I was drowning in information. With each new thing I learned there was yet another layer. The thing that infuriated me the most? WTF is a put and a call?! Spoiler alert – unless you’re day trading (which is basically gambling IMHO) you don’t need to know.
Fortunately, once you get past the initial learning curve, it isn’t nearly as scary as it seems at first glance. There are many different ways to invest your money; but there are only a few good ones for long-term investors. Read on to learn about some of the best ways to invest money so that it grows over time.
Diversification is the key to growing your money.
The best way to invest money is to diversify your portfolio. Diversification means you have a mix of different types of assets. In the context of investing, assets are the things you are investing in, such as stocks, bonds, mutual funds, ETFs, real estate, etc.
With a well-balanced portfolio, you’re lowering your risk of losing a large amount of money. If one part of your portfolio isn’t doing so hot, the other parts are there to help offset that loss. This is important because no investment is guaranteed.
A stock could be great today, only to tank tomorrow. Bonds could be a poor source of income today, but are less risky in the long run. Unlike one-off trades, you don’t have to guess which investment is going to do well; your portfolio should average out over time.
Investment Strategies for Long Term Growth
There are a few long-term strategies for growing your money that you can implement as soon as you’re ready. What does ready mean when you’re looking at how & where to invest money? It doesn’t mean saving up oodles of cash that’s for sure. You can start investing with as little as $1.
Long-term investment strategies tend to forgo risky investments (can anyone say crypto?). Instead, they favor easy, set it and forget it strategies like broad market ETFs (read more below) where you invest in up to the entire stock market. These strategies also involve hedging your bets with diversification, that could mean keeping some money in bonds or cash.
A mutual fund is an investment vehicle that pools money from multiple investors and puts it towards a wide variety of stock or bond investments. Mutual funds are professionally managed by a fund manager who either passively or actively chooses which industries or companies to invest in. Passively managed funds follow already established indexes, such as the S&P 500.
If you’re looking for a safe and easy way to invest money, mutual funds can be a great option. There are lots of different types of mutual funds to choose from, so you can select the fund that matches your risk tolerance.
Risks of Mutual Funds
Mutual funds are relatively safe, but they aren’t without risk. The fund manager could make poor investment decisions that hurt your returns. Additionally, there are costs associated with mutual funds, such as management fees, fund distribution fees, and trading fees. You also can’t control the timing or magnitude of mutual fund growth.
To mitigate these expenses you can look for passively managed funds. You can find these by looking at expense ratios. A rule of thumb I learned is to look for funds that cost below 1%.
Exchange-traded funds (ETFs) are like mutual funds in that they pool together a variety of different stocks, but they’re traded on the stock market which means that you can buy and sell ETFs throughout the day just like stocks. This gives you more flexibility, but for long term investors, who set it and forget it, it doesn’t mean much.
ETFs can be a great way to diversify a portfolio, and they are a good option for long-term investing strategies. There are seemingly endless options for ETFs that run the gamut from the whole stock market, to industry focused. Look for options that are low cost and keep you diversified, just like with mutual funds.
Risks of ETFs
ETFs can be low-cost and easy to buy and sell. However, some ETFs can be very risky. For example, an ETF that invests in emerging markets is likely to be more volatile than an ETF that invests in U.S. stocks. You need to be careful about the type of ETF you invest in. If you don’t understand the risk associated with a particular ETF, you might want to skip it.
Single stock investments can be a risky way to invest money, but can yield high rewards. You have to be willing to accept the risk that the stock won’t go up, or even worse, that it will go down significantly. Imagine if you put all of your cash into Blockbuster a few decades ago…
The best way to start investing in stocks is to open a brokerage account and purchase a few individual stocks. This allows you to control the specific companies you’re investing in, which gives you more control over your risk.
I tried investing in single stocks with an experiment on Robin Hood. Despite following all of the advice I could find online, I still lost money. For me this just isn’t the right strategy.
Risks of Stocks
Investing in stocks is risky, which is why it’s not a strategy I employ. You never know when the stock will go up or down, or if it will even go up at all. Trying to figure out if it will go up or down is something of an informed guessing game, there are no guarantees here. There are plenty of examples of stocks losing significant value, or even going out of business, despite strong economic conditions.
Bonds are essentially loans to the government or big companies that need money but don’t want to pay high interest rates. They can be a great way to earn some interest on your savings and aren’t very risky. They’re a safe investment that provides a predictable return as long as the company or government pays back their loan.
You can buy bonds through a brokerage account or through an investment fund. They come in many varieties, such as treasury bonds or corporate bonds. Treasury bonds are backed by the U.S. government, so they’re a very safe investment but generally have a low return.
Corporate bonds are an investment in a specific corporation, so they tend to be riskier but also offer a higher return.
Risks of Bonds
Because bonds are generally a safe investment, they usually provide lower returns than stocks or ETFs. You’re guaranteed a certain amount of interest each year, but the value of your bond will go up and down as interest rates fluctuate. There is also always the risk that the company or government will go bankrupt and not pay you back.
A robo-advisor is a type of online investment service that manages your investments for you. You provide details about your financial situation and goals, and the robo-advisor creates a personalized investment plan for you.
If you’re someone who doesn’t want to spend time learning how & where to invest, a robo-avdisor might be the right starting point for you. In addition, many of them are free to get started! Just watch your monthly costs, those small payments can add up to big losses if you use robo-advisors as a long-term investing strategy.
Many robo-advisors put your money into low-cost index funds or ETFs, which are relatively safe long-term investments. Plus, they will automatically rebalance your portfolio to keep your risk level consistent.
Risks of Robo-Advisors
The biggest risks involved with robo-advisors are picking the right ones, and watching your monthly fees. Personally, I started with hobo-investing and used it as a learning step, watching how my money fluctuated over time, and what investments it picked based as I shifted my risk tolerance in the apps. Then I moved to a brokerage fund to control my own investments and stop paying extra fees.
There are many, many ways to figure out how & where to invest your money. The right answers sit with you- your goals and your risk tolerance. Goals will influence whether or not you choose a long-term investing strategy, like I do, or seek out a short term strategy. Risk tolerance will influence how you diversify your portfolio.
There’s no single answer, but it also doesn’t need to be so overwhelming. Happy investing!