Should We Start Investing or Not?
At the end of the day, you are losing money by keeping it there and doing nothing with it. Surprisingly you are also losing money by keeping it in a savings account because the rate of inflation is higher than the return of the 1- 3% that you are getting from your savings account. Investment may be one of the best ways to keep up with the inflation rate; however, many believe that investing will cause you to lose a great amount of money. When you listen to many others share their experience with investment, they often share stories about the time that they have lost a great amount of money and advise you against it. This is only a contrary belief that people have on investment as it is not as dangerous as many believe it to be. There are many different types of investments and ways to make investments less risky as it is a great way for us to save up for retirement, catch up with inflation, or maybe even save up for a trip. How do college students or those who are new to investment learn how to invest?
One question that may pop up in our day-to-day life is what is investing? Well, according to Merriam-Webster, the dictionary definition of investing is to “expend money with the expectation of achieving a profit or material result by putting into financial plans, shares, or property, or by using it to develop a commercial venture.” Investing is a common way for us to grow money without having to spend hours working. There are different types of investments, such as stocks, index funds, bonds, real estate, etc. Investments are usually a way of supporting and believing in a company, that it will grow bigger, and in return, they give you a dividend or interest. Of course, with its benefits, there are also a few factors of risk that we still must consider.
One common misconception of many may be that there is only one form of investment and that is stocks. A simple understanding of stock may be gaining a faction of a company’s ownership, earning, and assets and the value of a stock is based on the company’s performance daily. Some of the companies that you can invest in are Apple, Target, Amazon, and much more. Stocks are considered to be one with the highest return but with the greatest risk. Stocks have a great potential for growth for long-term investment; however, when you look at it for short-term growth or a way of learning a quick buck, there is a great chance that you’ll lose money. The performance of a company is based on many factors, thus causing the stock market to fluctuate greatly. If someone comes to you with an offer saying that there is a 100% chance you will gain a certain percentage of return, do not believe in them. Stocks are highly unpredictable and often contain no trends, there is no way that they can accurately predict the amount of return. One saying goes if it sounds too good to be true, then it is most likely to be false.
Investor.gov, a government website that focuses on explaining investment to the public, states, “Stocks offer investors the greatest potential for growth (capital appreciation) over the long haul. Investors willing to stick with stocks over a long period of time, say 15 years, generally have been rewarded with strong, positive returns.” When people look at investments for a short-term factor, they can either make a lot of money at once or lose a lot of money at once. In reality, you really have to do your own research and find the different investments that you want to invest in. Oftentimes when you look at a long-term trend of a stock, it will most likely keep on increasing. The stock market will drop, but over time it will recover and overall give you a high return rate. Investment usually takes a long-term worth of effort, where you slowly build up the amount. One tip would be to invest little by little each month. This way you will be investing in different time periods of the ups and downs, minimizing your risk. You can try fraction shares, where you buy a small percentage of stocks when you don’t have enough money to buy a full stock.
Chris Davis quotes a certified financial planner and CEO of Amity Financial Planning in Pittsburgh, Micheal Pappis who says, “A fractional shares can address these issues. Dollar-cost averaging with fractional shares allows you to invest the full amount of cash you are putting into your investment account on a weekly or monthly basis,” Pappis says. “Whereas without fractional shares, some of your money may have been sitting in cash before there was enough to purchase a full share. (Chris Davis)” Stocks are usually costly to purchase and many with lower amounts of income will choose against buying stocks because they are scared that they will lose too much money than they can handle. So maybe a fraction share is the best decision for you to purchase because you don’t have to spend a bank-breaking amount to start investing. Index funds are a combination of stocks from different markets and countries balancing out the increase and decrease of different companies. It often has a fraction of the stock of different companies such as Apple, Target, etc. Index funds fare usually a couple thousands of dollars to purchase and not everyone will be able to afford that account every month, so websites such as Charles Schwab can allow you to buy a fraction of the index fund for a low amount of cost and you can choose the stocks that you want to purchase within an index fund. Thus, creating your own portfolio and helping stabilize your portfolio over an economic cycle.
According to Adman Hayes, a writer, and editor at Investopedia since 2014, with a Ph.D. in economic sociology, “One-way investors can reduce portfolio risk is to have a broad range of what they are invested in. By holding different products or securities, an investor may not lose as much money as they are not fully exposed in any one way.” When it comes to investors, it is better to invest in a great range of stocks. This is because not all markets will perform horribly on the same day or the same period of time. So, by investing in index funds, you can minimize the amount that you will lose. This can be achieved by investing in index funds. Index funds contain a wide variety of stocks in smaller percentages. Index funds have a lower risk than stocks because different fields of the market will be doing well or poorly at different periods of time. My economics teacher once told me that before you worry about the fall of all the stocks in the market, you will have to worry about the fall of the world first. There isn’t much of a possibility that the stock market will suddenly collapse unless the economy collapses. Therefore, you don’t have to worry about the fall of the stock markets, if you are investing in index funds because it covers different parts of the markets and in different fields of interest.
When considering what stocks, you want to invest in, you must consider your age as a factor. When you are younger, you will most likely want to have more stocks than bonds because you have more time to recover from a loss. If you are older and closer to the age of retirement, you will most likely want more bonds than stocks because it is safer. What is a bond you may ask. Well, a bond is usually a predictable income, where it is like giving someone a loan for their company and they will return the money based on the face value of the market after a period of time. This is issued by the government making it a very safe investment as it has a set or promised amount of income. One downfall of bonds is that the amount of return that you will get back is typically very low.
According to Wells Fargo, a well-known investment bank and company, “The amount of risk you carry depends on your appetite — or tolerance — for risk. Only you can decide how much risk you’re willing to take for the potential of higher returns. But if you’re seeking to outpace inflation, taking on some risk may be necessary. An increase in risk may provide more potential for your money to grow.” There will always be a risk behind investing. There are only ways to minimize the amount of loss by investing in different aspects of the market. There is a mistake that some people make when they first start to invest is to panic and sell all their stocks. When you are only focusing on the risk, then you will lose the benefits of the returns that you can earn in the long run. Only go into higher risk investments such as stocks after doing your research because there still contains that factor of risk that you will suddenly lose all your life savings.
Some tip that I would give is to start off with a Roth Ira, where you can start saving for retirement. This account allows for tax-free growth and tax-free withdrawal when you retire. One disadvantage is when you take out money before you become 59 ½ years or older and have owned the account for 5 years, you must pay a penalty fee. This fee is usually 10% of the amount withdrawn, and you will have to pay income tax on the amount you earn. Opening a brokerage account is another option, where you can invest and save for a big purchase in the short term, such as a vacation, house, car, college funds, etc. It is a good plan if you are planning to save for about five years or more. You are free to take out money whenever you want. However, one disadvantage is that you will have to pay for the income tax from your gain and dividends.
In conclusion, investment is often a great way for you to gain money without having to spend time earning the money. With the benefits of investing, there also is the risk that the market will fall, and you will lose all your money. There are only tips on how to minimize the risk of investing, but there is no way of eliminating all the risks. Ways to minimize the risks is to invest in a wide range of stocks because different markets have different highs and lows. You can also invest in bonds, which is safer as it is issued by the government and has a promised number of returns. Always view investment as a long-term goal and not as something, where you are trying to earn quick money and just leave. “The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett