If you have worked for over 25 years, then you have probably starting to save for your future. This is positive, but you can make greater returns if you make that money work for you and don’t let it sit doing nothing. Imagine for a moment that your current savings are like a small plant; you need to give it continuously nutrients and water, as well as providing adequate conditions for growth to occur. Put it this way, if you always place your savings in a savings account using normal banking, then you should look at alternative forms of growing your money – in a more productive and quicker fashion.
One approach to understand how to invest is to consider investment methods. Don’t be taunted by investment as many people tend to be. This is only because most people do not understand how investment strategies work and believe them to be the domain of the stock market trader – it doesn’t have to be that way. Below is an introduction and simple guide to investment which will let you build up your knowledge and confidence so that you can make some strategic financial decisions with your savings.
What is Investing in Simple Terms?
- Investing is quite simply buying and selling of stocks and shares, bonds, options, certificates, or more.
- You can get help with investing from financial brokers and advisors although you will need to pay for their services and skills – but you may need their support if you are new to the World of investing.
- Investing can be easily done at home with a computer with an Internet connection.
How To Invest?
If you want to start investing then you will need to have some ready money and assets available. You will need to ensure that you stick to the golden rule: always have enough money and cash in reserve should you need to survive for three months in the case of any emergencies.
There are loads of different stocks and mutual funds in the market for you to choose from so it is essential that you follow an investment strategy that will provide you a return on investment (ROI) in the long run. Here are three very simple rules to investing:
- What to buy?
- When to buy?
- When to sell?
What Shares or Funds Should You Invest In?
The total investment market consists of over ten thousand different titles, so how can you possibly select what stocks that you should decide to buy? Fortunately there are indicators such as the Dow Jones Industrial Average, the SP 500 and the Wilshire 500 amongst others. These can help you make stock picks from the New York Stock Exchange. Here’s how the three of them work:
- The Dow Jones share price reflects the average of the top 30 largest companies.
- The SP 500 reflects the average stock price of 500 businesses, representing companies that are worth 75% of full market value.
- The Wilshire 5000 reflects the average stock price of over 7,000 companies.
A proven investment strategy is index funds via a mutual trust fund which consists of all the five hundred stocks in the SP 500. What this means is that you will only invest those companies but are also diversifying and reducing your risk.
You might also want to consider managed professional funds. But how do they stack up and compare against index funds? Here’s a list of the pros and cons to both types:
Pros and Cons to Index Funds
- Your transaction costs will be less
- You will benefit from a lower tax rate
- Your portfolio turnover will be lower
Pros and Cons to Professionally Managed Funds
- Higher cost greater than 2%
- Higher transaction costs
- Higher tax rate
- Higher portfolio turnover due to higher risk
Therefore if you are a beginner to investment and do not know how to invest then the less risky approach is to invest in index funds given the lower costs, greater stability, and proven good past performance.
When is the Best Time to Buy Stocks or Funds?
Now that we have covered how to invest you should really also be aware of the benefits are to understanding compound interest – essentially the more you buy, the more money you will end up actually getting back as interest (which ultimately means profit). You don’t need a huge amount of money to start off with either as you can invest periodically, for example just once a month.
Since stock prices will often fluctuate there are months when prices are slightly lower so you can buy more that month. As a result the value of your total portfolio will increase dramatically due to several shares bought in at the lower prices.
Jame Hitchens regularly contributes to financial newsletters and stock market blogs. James is an investor and uses the Hulbert Interactive tool in order to help him make the best investment decisions when playing the stock market. If you want to know more about this online tool then please click here to find out more.