How to Invest
There are two ways to make money: you making money (through your daily job/work) or money making money. Investing is having your money make money for you, and is the only way to make money 24/7 while you sleep.
The goal of investing money is simple – to increase your financial resources and compound them over time so you can live off your investments, not your daily work (unless you want to).
Whether you’re a first-time investor, or have some experience, we’re here to help you begin the process having your money make money for you.
It’s important to note you don’t just want to throw your money into any security that will give you a return. You must consider a few key staples of investing your money, and how to do it to maximize your financial efforts. Below we are going to share a few methods for investing your money into the financial markets (in no particular order).
- Stocks – investing your money into stocks allows you to own a small portion of that company and the potential value it can build over time. When you invest in a stock, the goal is to capture a large portion of the value they create over time as it takes time to create massive amounts of value in any company.When the stock of a company you invest in gains market share, capitalization and value, you profit with them.
Examples of individual stocks you can buy are Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) - Index Funds – sometimes its better to invest in an index fund that tracks a market and large numbers of stocks. It’s a way to instantly diversify by investing in the index fund, and thus have investment holdings into lots of stocks.
The goal of investing in index funds is to a) diversify and b) balance the risk of your portfolio so you’re not solely invested in individual stock companies.Examples of index funds are the S&P 500, the Nasdaq and the Russel 2000. - ETF’s – these are exchange traded funds that come in active and passive forms. Passive ETF’s track stock indexes like the Nasdaq and try to match the performance of the Nasdaq. Meanwhile active ETF’s have portfolio managers that choose which stocks to invest in with the goal of beating the market.Generally, most ETF’s pay dividends which is a way to earn a second income on your invested capital.Examples of ETF’s are TLT (NASDAQ: TLT) and IWM (CBOE: IWM).
How to Invest Your Money
While we are not financial advisors and suggest you seek out a certified financial advisor, from our two decades experience in the financial markets, we’ve found there are a few variables you should consider in terms of where and how to invest your money.
Some examples are:
- Your Age – younger people generally are able to take more risk on early as they have more time to save while older people generally want to protect the capital they have focusing on that first before capital appreciation.Hence a general rule is if you are in your 20’s-30’s, have some decent risk invested, if you are in your 40’s-50’s, less risk while focusing on stable growth, and for those 60’s and above, capital preservation should be your primary focus.
- Your Debt Profile – generally, we do not recommend investing if you have bad debt (i.e. debt that has a 10% interest rate or higher). If you do, we recommend clearing your bad debt first before investing.For those of you that have very little bad debt, and mostly good debt (debt that yields a return, like a mortgage), then we recommend putting aside some capital for investing.Hence understanding how much debt and what kinds of debt you have is a factor to consider.
- Your Budget – if at the end of each month, you have virtually no savings, we do not recommend putting money aside to invest. We’d recommend putting aside several months of savings before investing.If, however you have several months of savings, then we’d suggest putting money aside for investing.
- Your Goals – what your investing goals are will have an impact upon what you invest in and how. Are you putting money away for retirement, trying to invest for your kids college tuition, or wanting to grow your net worth either through stocks or some physical assets (like real estate)?Whatever your goals are will determine what you should invest in, and how.
Passive vs Active Investing (which is better)?
Generally investing is divided into two categories, active and passive.
Active investing consistently analyzing and evaluating your investments that you build and maintain on your own. Generally this requires you to have the time to do so, the knowledge to do so, the skills to do so, and the interest to do so. If you are missing any of the list above, we recommend making sure you continually work on all four variables above to actively invest on your own.
Passive investing is either having someone else do the work for you, or just throwing in your money into a few investments, then adding to them periodically over time.
It’s like hitting the cruise control on the highway, without any steering. It requires less time, less knowledge, less skills and less interest.
It should be noted the wealthiest investors have generally been in the active investing camp, choosing where to put their money, when, and how. This is harder to do, but the potential upsides could be far greater.
Meanwhile passive investing is a low-key project and can compound wealth over time, but you may certainly miss certain trends short and medium term. Very rarely does a top 100 investor in the world do so through passive investing.
You’ll have to decide which of these approaches is better for you.
Final Thoughts
Investing in the financial markets is a skill we recommend everyone should build over time. Sadly, most educational programs globally do not teach financial literacy or how to invest your money.
Yet learning to do so gives you the potential to build multiple streams of income outside of your normal 9-5 job. Hence its important to at least learn some of the skills needed to invest your money based upon your time available, interest, age and goals.