If we’re going to be good managers of the money we have, we need to know how money actually works. The financial world has no shortage of buzzwords, which can be confusing to people who are just beginning to build their investment portfolios. Here, we share (and explain!) three tips for new investors.
Gather compound interest
You can do three things with a sum of money: spend it, keep it exactly as is, or grow it. Compound interest, or compounding, is a term used to explain the concept of growing your money. Essentially, it’s making money on top of your money by investing it. If you invest $100 and make 10% on the investment, that $100 turns into $110. If you make another 10% the following year, you earn $11 on top of that. That means your initial $100 has now turned into $121. Invest your money and keep it in that account growing so the amount will increase over time.
“Time in the market beats timing the market.”
Invest in a total stock index fund
If you want to own stock but aren’t sure where to invest, a total stock index fund is a great place to begin. It’s a diversified group of more than 3,500 companies of varying sizes. The fees are very low, which means it only costs you .03-.05% each year to own an aggregate of the stock market. You wont pay a huge mutual fund fee or have to decide which industry to invest in; you’ll gain the broad exposure the total market offers. This also protects you from losses that could occur if you invest all of your money in one specific industry. Your money will be spread across industries.
Automate your finances
We automate so many aspects of our lives, so why not automate our finances? Automating financial activities will help you make progress toward your goals without having to think about them intentionally each month. Automation frees your time and mental energy from hassling with manual transactions. Leverage technology to automate paying your bills, giving to charity, and even your investing.
With automated investing, your money will enter the market at different values, depending on where the ever-changing market sits at that particular moment. As the stock market goes up and down, some of your money will enter during higher months and others will enter during lower spells. When the market recovers, and it always does, you’ll be glad some of your money was invested in those lower months. Investors who do not use automation were likely too nervous to enter the game in those months, but for you, the risk will pay off in a big way. If you tend to be risk averse, automated investing can help you minimize risk in an otherwise volatile market.
Additionally, we don’t recommend cash as a long-term portfolio position. We expect the market to rise and fall, and then rise again. Over time the market goes up, so our approach is: you’re better off investing now instead of waiting to time the market – whether you invest a large sum upfront or invest monthly as you earn.
To be a wise money manager and steward your resources well, you need to understand investing or trust your advisor. Schedule a call to learn more and make a plan together.
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