When we think about investing, a lot of people imagine what’s shown in movies or shared in the media. We hear stories of people becoming millionaires — or losing it all — from one trade. It’s not surprising then that only 48% of American adults invest in stocks, and only 25% under the age of 30 have money in stocks.
While many people know the benefits of investing — that you can make your assets work for you to earn more money potentially — they don’t know what exactly investing entails and where to start, and they worry about making potentially disastrous mistakes.
If you’re in this boat, you’re not alone. But don’t let fear prevent you from investing. With a little knowledge of the world of investments, you can have a greater understanding of your opportunities and what steps you should take next.
What is Investing?
In the most basic sense, investing is dedicating an amount of money to a venture with the hope that you’ll make a profit. Essentially, you work to earn an income and then you put some of that money to work in anticipation of earning more. Investing offers you an opportunity to maximize your earning potential.
When you choose to invest, you do so through various investment vehicles that make up a portfolio. These types of investments include bonds, stocks, mutual funds, and alternative funds, such as real estate. Depending on the amount of risk you’re willing to take and how involved you want to be, your portfolio can contain a diverse mix of products. Regardless of your goals, most advisors agree that diversifying (including multiple investment types) your portfolio can help reduce your risk.
It’s important to understand that investing and gambling are very different. When you gamble, you are putting your money at risk based on a guess and hoping that you will win money rather than lose it all. Investing involves much more analysis and deliberate action, and you only invest if there is a reasonable expectation of a profit and the funds are available. It’s easy to confuse the two when we watch movies like “The Wolf of Wall Street,” but true investing isn’t designed to be played as a game.
How to Start Investing
As explained earlier, there are a lot of myths and misconceptions about investments. Some people assume it’s easy to invest if you just choose the hottest stocks, like Apple. Other people believe investing is only available to the wealthy. The reality is, investing isn’t easy, but it’s also available to everyone if they are willing to dedicate some time, money, and energy.
Before you begin investing, you need to know yourself and your risk/reward comfort level. Too often, new investors think they’re willing to take a lot of risk in the hope of a big reward. But when push comes to shove, they are devastated by the idea of potentially losing a significant amount of assets. Because different investments feature different risk levels, you have to first understand your goals, time horizon, risk tolerance, and more.
This is where a financial advisor comes into play. Using advanced technology, software, and experience, an advisor can help you formalize your investment goals, determine your risk tolerance, and explain which investments may be most appropriate for you. An advisor will also help you monitor your investment performance over time so you aren’t bogged down with such an important but time-consuming task.
The Costs of Investing
Even once you have a handle on your investment options, there’s a lot more to know about investing before diving into the markets — such as understanding investment fees. Investing isn’t free; in fact, there are quite a few fees involved. There can be trading commissions, fund fees, tax expenses, front-end loads, back-end loads, and ongoing loads (sometimes listed as A, B, and C shares for mutual funds). Then you may also face 12b-1 fees, which cover a fund company’s marketing and distribution costs, and management fees.
If you don’t know what fees to look out for, you may end up paying more than expected, which can quickly eat into any profits you make. This is why DIY investing isn’t always the most time or cost-effective route. While you may save on management fees by managing your portfolio yourself, you may end up purchasing expensive funds with hidden costs.
An independent financial advisor is required to work in your best interests. Along with determining your investment goals, risk tolerance, and financial needs, an advisor can guide you through the costs and pull back the curtain on what you’ll be paying.
Before you start investing, download our whitepaper “The (True) Cost of Investing,” to learn more about the importance of fee transparency and how fund costs can potentially derail your strategies and portfolio.