Investing 101

The purpose of investing is to take the money you have and generate additional money. For most people, the way to attain financial security is to save and invest over a long period of time. With investing, time is your ally. The sooner you start, the better.

If you are a first-time investor (or fairly new at it), here are some basics to help you understand the process and make well-informed choices so that your money works for you.

Think long term

First off, invest with the long term in mind since the market has an inherent upward bias over time. Historically speaking, the longer your money stays in the market, the more it’ll grow. For instance, the S&P 500, which holds 500 of the largest stocks in the U.S., has historically returned an average of around 7% annually, when you factor in reinvested dividends and adjust for inflation. That means if you invested $1,000 30 years ago, you could have around $7,600 today, reports Arielle O’Shea for NerdWallet, a personal finance website. In fact, Warren Buffet, one of the most successful investors of all time, and CEO of Berkshire Hathaway, has this popular quote: “Our favorite holding period is forever.”

Understand the risks

Unlike the banking world, where deposits are guaranteed by federal deposit insurance, the value of stocks, bonds, and other securities fluctuates with market conditions. There is no guarantee you’ll make money from your investments, and they may lose value. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money, according to the U.S. Securities and Exchange Commission (SEC), which enforces the laws on how investments are offered and sold to you.

The SEC offers the following strategies to help you get started and achieve success over the long term:

Diversify your investments

The idea is that if one investment loses money, the other investments will make up for those losses. Diversification can’t guarantee that your investments won’t suffer if the market drops. But it can improve the chances that you won’t lose money, or that if you do, it won’t be as much as if you weren’t diversified.

Gauge your risk tolerance

What are the best savings and investment products for you? The answer depends on when you will need the money, your goals, and whether you will be able to sleep at night if you purchase a risky investment (one where you could lose your principal).

For instance, if you are saving for retirement, and you have 35 years before you retire, you may want to consider riskier investment products, knowing that if you stick to only the “savings” products or to less risky investment products, your money will grow too slowly. Or, given inflation and taxes, you may lose the purchasing power of your money. A frequent mistake people make is putting money they will not need for a very long time in investments that pay a low amount of interest.

On the other hand, if you are saving for a short-term goal, five years or less, you don’t want to choose risky investments, because when it’s time to sell, you may have to take a loss.

Learn about investment options

Stocks, bonds, mutual funds and ETFs are the most common asset categories and among the asset categories you would likely choose from when investing in a retirement savings program or a college savings plan. Before you make any investment, understand the risks of the investment and make sure the risks are appropriate for you. You’ll also want to understand the fees associated with the buying, selling, and holding the investment.

Things to know before you invest

Stocks, bonds, mutual funds and ETFs are the most common asset categories and among the asset categories you would likely choose from when investing in a retirement savings program or a college savings plan. Before you make any investment, understand the risks of the investment and make sure the risks are appropriate for you. You’ll also want to understand the fees associated with the buying, selling, and holding the investment.


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