How to Invest Money: Fundamentals of Investing

You might come across words like stocks, bonds, real estate, and retirement accounts but are confused about how to invest and where to begin. Don’t worry! SpearHead Researchers is here to assist you in navigating the options while considering your budget and financial situation. Before investing your money into the stock market or any other investment, it’s important to grasp the fundamentals.

The key to investing wisely lies in choosing the option that suits you best. It entirely depends on you to determine your investment approach, budget, and risk tolerance to discover what works for you. While picking the right investments can be daunting, SpearHead Researchers can simplify things for you. We’ll help you allocate your money by saving you time and unnecessary effort. 

Why Is It Important to Invest?

Your future can be more secure by investing now. While saving is important, it isn’t enough to outpace inflation. Something you buy with $100 today may cost $110 in a few years. Investing gives your money the potential to outpace inflation and ensure that your purchasing power does not decline as time goes on so you can achieve your financial goals like buying a home, planning for your family, or saving for retirement. 

Step 1: Set A Clear Goal 

Before asking “What should I invest in?”, you should ask “Why am I investing?” Reasons can vary from a big event like buying a home, saving for retirement, or accumulating wealth in general. Your goals will determine the best approach:

• A major purchase (like a home): Your preferred strategy will have a better balance of growth and lower risk. A medium-term strategy will be best for expenses coming up in the next couple years.
• Retirement: Long-term investments, usually in retirement accounts such as a 401(k) or an IRA, are ideal if your goal is to save for retirement. 
• Building wealth: If general wealth accumulation is the goal, a long-term approach with diversification is typically best.

Understanding your objectives and timeframes can help you evaluate how much risk you can tolerate and which investment types to go with.

Step 2:  Have An Emergency Fund

Before investing, make sure you have an emergency fund established. This fund should cover three to six months of living expenses and be kept in a liquid, easily accessible account, such as a savings account. It acts as a safety net for unexpected expenses like medical emergencies, job loss, or significant home repairs. Without this cushion, you may have to sell your investments early, potentially at a loss.

Step 3: Understand Risk and Return

Every investment carries risk. The more you’re willing to tolerate, the higher the potential upside; however, there is always an increased chance of losing money.

• Stocks: Typically more risky. Stocks, historically, have provided greater revenue over time. They’re good from a long-term growth perspective but can be volatile in the short term.
• Bonds: These carry a lower risk level than stocks and offer a fixed return. They are more stable, but they typically have lower returns.
• Cash Investments: Saving accounts and Certificates of Deposits (CDs) offer minimal risk, but also minimal returns with a lower chance of keeping up with inflation.

Step 4: Calculate The Amount You Want to Invest

When choosing which investment accounts to set up, it’s important to consider the amount of money you intend to deposit into each type of account. The portion you allocate to each account will depend on your investment goal in the initial phase and the timeframe you have to reach that goal, known as the time horizon. Additionally, there might be restrictions on the amount you can invest in certain accounts. For instance, the IRS imposes yearly contribution limits for retirement plans like 401(k)s and IRAs. 

Step 5:  Select A Brokerage Account

Before you can start investing, you’ll need to open a brokerage account. Just as there are various types of bank accounts (checking, savings, money market, and certificates of deposit), there are a couple types of brokerage accounts to be aware of.

Some accounts provide tax advantages if you invest for a specific reason, such as retirement. Remember that you may be taxed or fined if you withdraw your money prematurely or for a purpose not permitted by the plan rules. 

• • 401(k): Many workplaces offer 401(k) plans, which allow you to contribute pre-tax funds and grow your investments tax-free until the funds are withdrawn in retirement. Many firms provide matching investments, which is free money.
  •  IRA (Individual Retirement Account): If your job doesn’t offer a 401k or if you want to explore more saving options, an IRA is a great choice. You can make contributions before taxes, through a Traditional IRA or after taxes, using a Roth IRA depending on your income and goals.

• Traditional Brokerage Account: A traditional brokerage account is a standard investment account that allows individuals to buy and sell securities, such as stocks and bonds. They don’t offer the same tax advantages as retirement accounts, meaning income earned from investments is subject to taxes in the year it’s received. These will be best for your short to medium-term goals.

Step 6: Build Your Portfolio

Once you know your objectives, risk tolerance, and the amount of capital that you want to invest; it’s finally time to build your portfolio. 

Some common investments you can include in your portfolio are the following.

• Stocks: This asset represents ownership in one specific company. If the company does well, the value normally increases. However, if the company struggles, then the value of the stock also tends to decrease. Investors most commonly use stocks in their portfolios because stocks tend to have the greatest return over the long-term. Dividend investors can also use stocks for income.
• Bonds: These are loans to a company or government taken with the promise of repayment plus interest. Thus, bonds can provide a constant flow of earnings and lower risk but historically do not offer returns as high as the stock market. These are a good addition to the portfolio to balance the risk from stocks.
• Mutual funds: These are asset investment pools constructed to aggregate the collective funds of its shareholders to invest in a collection of stocks and bonds. Investors can own many stocks in the market with one fund instead of having to buy each stock one by one. Mutual funds are typically actively managed by the fund manager but may also be passively managed.
• ETFs: ETFs are similar to mutual funds and share all the same benefits but generally charge lower fees since they’re typically passively managed. They also have higher trading opportunities since ETFs trade in real-time, like stocks, while mutual funds trade only at market close through the fund manager. 

Step 7: Monitor Your Portfolio

Once you’ve chosen your investments, you should review and monitor your portfolio to make sure they still align with your goals. Maybe you want to reduce the risk as you get closer to retirement or you have new financial goals like buying a house. If your portfolio is aligned with your goals, you shouldn’t need to adjust it; especially with short-term market volatility. The most successful investors typically readjust their portfolios only once or twice a year.

Concluding Thoughts

Investing might feel challenging, but staying committed to your decisions and maintaining consistency is important to achieve your financial goals. You don’t need a lot to start, but the most important thing is to start early and stay consistent. If you’re looking for guidance on investments, consider consulting SpearHead Researchers. Your future self will appreciate the choices you make today. So take that leap and start your investment journey now!