Whether you have inherited a big windfall or you are socking-away some cash from every paycheck, one question may be on your mind: How do I invest? Thankfully, learning how to invest isn’t as difficult as most people think.
You do not have to be an actively involved investor to succeed as an investor – though, for the newest investors, it is probably best to limit your “money moves” to a maximum of three per month. Beyond that, though, the sky’s the limit. There are many different investment strategies, many of which can be used by neophytes and veterans alike.
In general, there are three types of investors who buy and sell individual stocks or mutual funds. There are also investors who are involved in both buying and selling individual stocks and funds on a regular basis. Then, there are investors who only buy and sell funds. This is a closer fit to what we would call a “regular trader.”
Of these three basic investment types, the most popular are institutional investors. These firms, like mutual funds, that pool funds together from all over the country. They use their collective buying power to pump up the value of stocks or funds.
An institutional investor will have his own brokerage account and usually have his own stocks and funds. The advantages of this arrangement are relatively well known – the commissions if any, are minimal and you can do much of your own research as well as take advantage of trading opportunities when they present themselves.
Another option for investors who don’t want to have to learn how to invest like the pros are those who have their own savings account like Betterment, Schwab, or TIA Investments. These investors invest in individual asset classes like the stock market, bonds, CDs, and more. Also, we recommend you study these especial resources for investors if you want to up your investment game.
It’s easy to see why these types of investors are so popular – the commissions are low, their investments are easy to buy into and they can easily move their money around as necessary. The only disadvantage to these types of investors is that they don’t have as many options when it comes to investing in individual securities like the stock market.
The third option for investors who don’t know how to invest like the pros is the DIY investing variety. This would include investors like you and me. This is the type of investor who builds a portfolio with the whole family or has an interest in building a portfolio for others.
This is by far the easiest way for an individual to get started building a portfolio. You don’t have to know how to invest, just like when you are an individual investor, you just buy what you know and have it grow from there. An interesting thing about investing in funds is that you rarely have to worry about diversification.
With funds, you can invest in virtually any investment that will return a profit. It’s much harder to build a diversified portfolio using individual stocks or mutual funds. There are also tax advantages to buying mutual funds as you can claim all of the dividends as long as you are paying tax on them.
Finally, there is another very good type of investment that very few people are familiar with… the high-interest debt investment known as an emergency fund. Most of us just think of our retirement accounts as being for retirement purposes.
The truth is, we should have another account for investing in things such as health care, stocks, and even the little cash we may have lying around the house. Your emergency fund basically acts as a savings account, but instead of putting money into the bank for a period of time, it places it into high-interest debt securities.
These securities pay a bit higher interest than your traditional savings accounts, but they are much more likely to pay out in a short period of time. All of these different types of investment opportunities should be well-diversified between your major asset classes.
If you don’t do this you will find yourself overwhelmed at some point trying to figure out where to start. That’s why it’s important to understand what all of your investments are and how you can invest them. It takes just a little effort on your part to get started on the right track to a successful financial future.