Have you ever thought about investing? It can be a good way to prepare for your financial future, but with all the different options, strategies, and trends, it can also feel pretty overwhelming. And because most investing advice focuses on starting as early as possible, the topic can be even more confusing for older potential investors.
But the truth is that it’s never too late to start investing, and it doesn’t have to be as complicated as it seems. There are simple investments and opportunities that don’t require thousands of dollars in disposable income to get started. Even small investments can help you make progress toward your financial goals.
So let’s go over the fundamentals of investing. Having a better understanding of how it all works makes it easy to decide what you want to do with your money. And if you’d like more in-depth advice or a personalized investment plan, the Guiding Wealth team is ready to help.
Investing Fundamental #1: Age Isn’t a Factor
Many books and articles out there tell people to start investing as early as possible. All those charts showing investment growth rates seem to assume that individuals can start investing when they’re 25 or even younger.
But not everyone has the resources or opportunities to start investing that young. Many people in their twenties —and even thirties — are still going to school and/or paying off student loans. They might still be working temporary jobs instead of starting long-term careers. For many younger people, investing often doesn’t seem appealing or feasible.
And that’s OK. While there are some advantages of investing early, most opportunities offer benefits regardless of the investor’s age. People who start investing as soon as they can generally still see returns.
Investing Fundamental #2: Compound Interest Is Powerful
What makes investing that different from just consistently saving money? One factor is compound interest. Basically, that just means that as long as money stays invested, it has the potential to earn interest. And that interest can be calculated on the entire value of the investment, including previous returns.
Here’s an example to show how compound interest works. Say Bob invests $100 and earns $5 in interest after a year, which is a 5% return. He could withdraw his money and be $5 richer. But if he leaves that money invested for another year, it’s like starting the process again — but this time Bob’s investment begins at $105. If he earns the same 5% interest rate, he’ll end up with $110.25 after a year.
If he leaves his money invested for another year at the same interest rate, that $110.25 yields $115.76, and so forth. Compound interest is like getting rewarded multiple times for doing nothing except leaving money invested. And it’s exponential, allowing investors the chance to increase their investment without actually contributing anything more than those initial funds.
This example highlights the basics of how compound interest works. But think about how powerful compound interest could be with a bigger investment over a longer period of time. An interest calculator makes it easy to see the potential gains compound interest can offer.
For example, if Bob invests $1,000 at a 3% interest rate that compounds annually and he waits for 20 years, he’ll end up with $1,806.11! That means he earned over $800 just from compound interest. If he starts with that same initial investment and annually compounding interest rate but also contributes $20 every month, he could end up with $8,255.00 after 20 years.
Of course, those examples are simplified. They don’t account for market instability and fluctuations in interest rates. But they still showcase the main feature of compound interest, which is that it allows an investor to earn returns on top of returns. Over time, those returns can add up to a significant amount, even if the initial investment was small.
Investing Fundamental #3: Investing Involves Risk
Unfortunately, risk is another fundamental of investing. Every type of investment carries some level of risk. Interest rates and stock values are subject to change, so there’s always a chance that an investment could lose value instead of gaining it.
Generally, the risk correlates with reward. In other words, the higher the potential return on an investment, the larger the risk of a potential loss. The exact details of how this works vary between investment opportunities, but the underlying principle is generally true.
For example, stocks tend to carry more risk than government bonds — but they can also offer a larger potential return. That’s why most financial professionals recommend having an investment portfolio that includes different types of investments. A diversified portfolio can help an investor balance potential risks and rewards.
Many potential investors find it frightening to think about losing the money they invest. But there’s another side to this coin — historically, most investments (including stocks) gain value over time. Market dips eventually resolve, and investments generally start growing again. A common strategy to counteract the risk of market instability is to make long-term investments that give the market enough time to recover.
Although many people automatically equate investing with the stock market, there are other types of investments:
- A high-yield savings account
- An employer’s 401(k) plan
- Certificates of Deposit (CDs)
- Mutual funds
- A money market account
- Government savings bonds
- Individual stocks
Investing can be complicated, and it’s important to align your investment strategy with your overall financial goals. If you’re not sure where to start, a financial planner can help.
Guiding Wealth Supports All Types of Investors
Investing offers potential rewards that can support many financial goals, from building net worth to saving for retirement. If you’re ready to start investing, it’s often a good idea to determine how much risk you’re comfortable with and choose assets that fit those parameters.
But you don’t have to do that research and make those decisions on your own. When you work with Guiding Wealth, you’ll get all the benefits of working with an expert on investing. A Certified Financial Planner™ can help you understand all the potential rewards and risks of any investment opportunity. And they can work with you to build an investment strategy that fits your risk tolerance and financial goals.
Are you ready to start investing? Schedule a consultation with our team, and let’s work together.