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Mutual Funds, Bonds, and Stocks: How to Start Investing and Saving
By: iTHINK Financial | Apr 11, 2022
Everyone gets scared at times, especially when it comes to finances. Even experienced investors get nervous.
A lack of knowledge combined with strong emotions can lead to a string of bad decisions.
It doesn’t have to be that way though. Mutual funds, bonds, stocks - these are terms for different investment options, and while some are riskier than others, they can make increase your overall wealth.
Saving for your future self and your loved ones’ future doesn’t have to be intimidating.
Here’s how to get started on investing and saving for the future.
Make Room for Investment
Decide how much you can invest, and how often. There’s a common misconception that you need a lot to start investing, but that isn’t true.
Before you even think of getting started investing, it’s important to make sure you have an emergency fund of at least 6 months. Put this money in a savings account and don’t touch it unless you absolutely have to - it’s called an emergency fund for a reason.
Once you have an emergency fund, you’re ready to start investing.
Understand Your Risk Tolerance
Prior to making an investment, you need to assess your risk tolerance. All investments have some type of risk, but some are riskier than others.
Riskier investments can have greater investment returns. If you’re looking to park your money in long-term investments, over time you can have great returns.
However, if your goals are short-term, lower-risk investments may suit you better.
An aggressive investor has a high-risk tolerance and is willing to risk potentially losing money to get better results. A conservative investor is the exact opposite of that. In between the two sits moderate risk investors.
So what should your risk tolerance be for investing? Whatever you're comfortable with.
Risk tolerance is usually associated with age. Younger investors are typically more aggressive, while older investors tend to get more conservative with their investment strategies, especially as they get closer to retirement.
When considering your risk tolerance, you need to consider the time horizon for your investments. The time horizon is the length an investment is held until the funds are needed. So for example, a long time horizon would be a younger investor in their 20’s saving for retiring at age 67.
Maybe you’re not thinking about holding on to your investments until retirement, but you want to purchase a house within a few years. Or perhaps you want to save for college, marriage, or another large expense. These would all be examples of medium-term investment horizons, since these events could all happen within a couple of years or ten years, but probably not longer than that.
Other Risks to Consider
Before deciding on your investment types, there are a few other risk factors you should consider.
Inflation is a common one. The unexpected rise in prices for consumer goods and services means any gains you earn could be abraded.
A borrower could be unable to pay their debts, putting them at risk of default.
Companies could go out of business or go bankrupt, resulting in any bonds or stocks they have issued to sink in value.
Finally, there’s market volatility. The overall financial market could be impacted by major world events, speculative behavior, or market crashes.
It’s important to note that even if the market crashes, it’s not the end of the world. When you sell your investments at a loss, you lock them in at the current price, missing out on any gains you would have received once the market rebounded.
Long-term investing and diversification can mitigate market volatility and other risk factors. The stock market has experienced dozens of crashes over the years but has always rebounded. It may take a few months or years, but the market bounces back.
Decide on Your Investment Types
There are a few different types of securities, or financial assets, you need to be aware of. Each has its pros and cons you should consider prior to investing.
Let’s start with bonds. A bond is a debt security issued by a borrower.
Think of it as an IOU for corporate or government debt. You buy a bond and loan the money to the issuer, which promises a specified interest rate during the life of the bond.
Bonds have a maturity date. When they reach that date (which may be a few years or even as high as 30 years) from the date of purchase, the owner of the bond (the investor) is paid the bond’s par value. The par value is the face value of the bond.
However, bonds also earn interest until their maturity date or until you sell them, whichever comes first. Bonds earn interest every month.
An example of a bond is U.S. Treasuries. These bonds are issued by the U.S. government, making them a safe and popular investment option.
Bonds are safe and affordable, making them a popular investment choice for many investors. There are also many types of bonds with different maturity dates, making them good for investors with all types of time horizons.
Stocks represent a portion of ownership of a corporation. A unit of stock is called a share, and these shares are sold on stock exchanges worldwide. Corporations sell stock to raise funds for operations.
Stocks are a riskier investment option than bonds. While the return on stocks can be higher, they can be volatile. In the event of corporate bankruptcy, bondholders are granted priority over stockholders.
That means that while a bondholder may still lose money, they may be able to recoup more of their loss than a stockholder would, as the corporation reorganizes itself and sells off assets in an attempt to become profitable.
Mutual funds are companies that pool money from many investors. They then invest the money in securities such as bonds, stocks, and short-term debt. That makes investing in a mutual fund a good option for diverse investments.
A popular type of mutual fund is a target date fund. Target date funds are retirement funds designed to help mitigate risk. An investor picks a target date (i.e. the year closest to when they would like to retire), and the target date funds are then used to invest in a variety of assets.
As the investor ages, the target date fund becomes more conservative and reallocates its funds from riskier investments with potentially higher returns to safer, less risky options.
Mutual funds are an affordable option for many investors. Since they include both bonds and stocks, they can also help an investor create a diverse portfolio.
Other Investment Types to Consider
Other investment options include annuities, initial coin offerings (ICOs) and cryptocurrency, and insurances like life insurance.
Again, it’s best to diversify your investments. That will allow you to better weather unexpected storms and surprises.
The Best Time to Get Started
The best time to get started investing is as soon as possible.
Time in the market beats timing the market. Investing when you’re young is one of the smartest financial moves you can make. Saving money early, even if it’s only a few dollars each paycheck, can have serious long-term benefits.
That’s due to a little something called compounding. Compound earnings mean that over time, the investment returns begin to earn their own return.
It can be a hard concept to wrap your head around, especially if you’re not good with numbers. Check out our long-term investing calculator for an easy way to visualize how your investments could grow over time. You can adjust the sliders for different options such as your starting balance, monthly deposit, and years and get an immediate visualization of your future finances.
Don’t worry if you’ve missed the boat on investing. It’s not too late to get started.
How to Start Investing
When you’re ready to start investing, consult a professional. Don’t fall for flashy apps or sites that promise impossible returns or don’t properly educate you on how to invest.
Investment apps are so risky that some states have issued warnings about the risks of self-directed smartphone investing apps. These apps “gamify” the investment experience, which can lead to unnecessary investment risks.
This can lead to impulse investing, resulting in a very risky and unstable financial portfolio. Then there’s the lack of education, security, and support that these apps provide. When something goes wrong, it can be hard if not outright impossible to contact an actual human to help solve your problem. Contacting customer support only to receive an automated response (or no response at all) isn’t exactly a morale boost, especially when your money is on the line.
That’s why when you’re ready to start investing, we recommend you contact an expert. A good financial advisor won’t cost you a fortune. In return, you can receive assistance in lots of different areas: retirement planning, estate planning, business planning, investment management, and more.
Ready to Get Started Investing?
Investing doesn’t have to be scary. The right advisor can talk with you and understand your unique needs, creating a personalized investment plan for you.
When you’re ready to get started investing, contact us.
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