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So, how do you invest your money wisely?
You probably already know that investing is one of the proven ways to grow your wealth and help you save for your retirement.
But if you do it the wrong way, it could cost you dearly.
So, what is the smart way to invest your money?
And how do you actually get started the right way?
How To Invest Your Money Wisely
Step 1: Determine Investment Options For Your Money
Before you start investing your money, you first need to know where you can invest your money.
Here are the 4 broad types of investment assets you can invest your cash in:
- Real Estate
- Alternative Investments
So, what should you invest your money in?
Which one is the best investment asset for you?
Is it better to invest in just one type of investment asset or several types of investment assets?
Don’t get overwhelmed.
We will help you answer all these questions one by one.
Before we do that, let’s understand more about each type of investment assets.
What are stocks?
Stocks are shares in the companies that are listed on the stock exchange.
When you invest in stocks, you are basically buying shares of the underlying business and become a part-owner of the business.
Do you want to own a part of Facebook?
Or do you want to own a part of Nike?
Or do you want to own a part of Disney?
This is all made possible by stock market investing.
When you buy shares of these listed companies, you instantly become a part-owner of the companies.
So, if the share price goes up, your investment value will go up as well (i.e you will make money).
If the business gives out dividends each year, you will get paid dividends as well.
How much dividends you get depends on how many shares you have and what is the dividend per share being paid out by the company.
Share investing allows you to share the profit of the companies or businesses that you believe in.
Now, what about bonds?
When you invest in bonds, you are basically lending money to either companies or governments and get paid a fixed interest rate which is higher than what you will get from your banks.
Generally, you will receive your interest payment at fixed intervals either semi-annually or annually.
The interest that you can get very much depends on the credit rating of the borrower and also the length of the loan.
So, if the borrower does not have a high credit rating, you will get a higher interest to compensate for the higher risk you are taking.
For example, there are bonds issued by the US government.
Given the fact that these bonds are considered virtually risk-free, you will only get 1.57% for the 2 year US treasure bonds and 2.25% for the 30 year US treasury bonds.
Yes, that’s not much, but it’s the closest thing you get to risk-free investments.
Now, what about lending money to companies?
These bonds are called corporate bonds.
There are good corporate bonds and junk corporate bonds.
In bonds, they use credit ratings to rate bonds.
You know everyone has a credit score in which banks use it to decide whether they want to lend you money and at what interest rate they want to lend you money.
Credit ratings for bonds work kind of the same way.
The higher the credit rating, the more likely you can repay your loan.
When bonds are rated as investment-grade, it means that borrower has a credit rating that is above a certain level and has a much lower possibility of defaulting the loan.
For example, Mcdonalds’ runs a profitable business and it has quite high credit ratings.
Its bonds pay an interest rate (i.e. coupon rate) of 3.125% for 8 years, and the interest payments are paid twice a year.
Now, let’s compare it with below-investment-grade corporate bonds.
Clear Channel Worldwide Holdings is an advertising company listed on the New York Stock Exchange.
This company has been making losses for the past few years.
And this is reflected in the high return that it offers to its bond investors.
One of its recently issued bond offerings has a high coupon rate (i.e. interest rate) of almost 10%.
Its coupon rate is much higher than Mcdonald’s which is about 3% because it has a higher possibility of default.
If you are serious about keeping and growing your money, stay away from junk bonds and only invest in investment-grade corporate bonds.
Now, we know a lot about stocks and bonds.
Let’s look at one of the most popular asset types – real estate.
Almost everyone has heard of real estate investing.
How it works is that you buy a rental property with zero to little downpayment.
Then, you rent it out at a monthly rental that can more than cover your monthly expenses (mortgage payment, maintenance, tax, etc).
This way, you will get a positive cash flow every month.
In other words, your rental property is putting cash in your pocket every month.
If the property value goes up, you will get capital gain on top of the monthly positive cash flow.
Having said that, this is the BEST scenario for investing in real estate.
What is the worst scenario?
Your rental property remains vacant and you have to fork out cash every month to pay for all the monthly expenses.
On top of that, your property value never goes up or even go down by a lot.
When it comes to investing, knowing the WORST scenario helps you make an informed decision and understand the risk involved.
Lastly, we have alternative investments.
What are alternative investments?
Alternative investments are investments like gold, cryptocurrencies, art, and private equity.
If you are just starting to invest, it’s best to stay out of it or only invest a very small portion of your money in it because these investment assets are mostly very volatile and always carry high risk.
Step 2: Build A Diversified Investment Portfolio
What is a Diversified Investment Portfolio?
Here are two very important investment concepts that I want to introduce to you:
- Investment portfolio
An investment portfolio is a set of financial assets owned by an investor that may include stocks, bonds, real estate or alternative investments.
Diversification means that you spread your money across different types of investments with little or no relation to each other.
Why do you want diversification in your investments?
Because you don’t want to put all your eggs in one basket and diversification can help you reduce your investment risk.
And the smart way to invest your money is to build a diversified investment portfolio.
Let me give you an analogy.
When you were young, you were told that to be healthy and strong, you need to eat a balanced meal that includes grains, dairy, meat, vegetables, and fruits.
Each type of food has its own unique benefits to your body.
Together, it gives your body all the nutrition it needs.
But, if you eat just one type of food or totally avoid eating a single type of food, your health will likely suffer in the long term.
Similarly, you need a balanced investment portfolio to reap benefits from different kinds of market conditions as well as protect you from various adverse market conditions.
For example, when inflation is higher than expected, your real estate and gold investments will perform better than other investments.
When economic growth is worse than expected, your treasure bonds will perform better than other investments.
Now, let’s go back to our original question – which investment option is best for you?
The answer is you should avoid investing all your money into any single investment category.
Instead, what you should do is to build a diversified investment portfolio that matches your risk tolerance level.
Of all the investment options, stocks, real estate, and alternative investments are considered to be risky and investment-grade bonds are considered to be less volatile and safer.
So, if you are a risk-averse investor, you might want to allocate a bigger portion of your portfolio to bonds.
However, if you are comfortable with taking higher risks, you might want to allocate more to stocks.
So, how do you get started building a diversified investment portfolio?
This is also the part where you need to decide:
- What are you going to invest in
- How much are you going to invest
- How often are you going to invest
- How long are you going to invest
Before we get to that, we need to find out what your preferred investing style is.
Do you prefer a hands-off approach to investing or a more hands-on approach?
If you want to be actively involved and pick your investments by yourself and constantly monitor the markets to look for profitable investment opportunities, then you should take a more hands-on approach.
In other words, active investing is more suitable for you.
If you are doing active investing, I highly recommend that you check out Motley Fool Stock Advisor which is one of the best stock-picking services.
So far, I’ve gotten quite a lot of profitable stock ideas that I would have otherwise missed out on.
You can read my review on Motley Fool Stock Advisor here.
However, if you don’t want to spend a lot of time picking and managing your own investments, then you should consider passive investing.
Passive investing is probably better for you if :
- You don’t have a lot of investing knowledge and experience
- You are not very passionate about investing or learning more about investing
- You have no time to pick and manage your investments
Step 3: Pick Your Investments Wisely
The most common example of a passive investing strategy is investing in an investment fund such as exchange-traded funds (i.e. ETFs) or mutual funds.
So, which one is better? Or should you invest in both?
The ONLY investment fund that you should put your money in is exchange-traded-funds.
First, what is an exchange-traded fund?
An exchange-traded fund (ETF) is an investment fund that holds assets such as stocks, bonds, or commodities.
It trades on an exchange, just like a stock. So, you can buy and sell ETFs the same way as stocks.
There are three broad types of ETFs:
- Stock ETFs
- Bonds ETFs
- Commodities ETFs
When you invest in a stock ETF, you are not buying just one stock but many different stocks.
That’s good because if you invest in just one single stock, you could lose all your money if that company goes bankrupt.
But that will NEVER happen with a stock ETF because it’s extremely unlikely that a group of companies can go bankrupt at the same time.
So, which stock ETFs are good investments?
There are stock ETFs that only invest in a specific industry like healthcare or financials.
However, I don’t recommend it if you are just starting to invest.
Here is what I DO recommend – Stock Market Index fund ( e.g. S&P 500 index fund)
An S&P 500 index fund invests in the 500 stocks that comprise the S&P 500 index, in market-cap-weighted proportions.
So, when you invest in S&P 500 index fund, it’s almost the same as investing in all the 500 stocks at the same time.
That is very diversified.
Diversification is good because your risk will be reduced.
Also, the index fund represents the health of the country’s economy.
A country’s economy can go through periods of growth and recession, but it will always grow over time in the long term.
What that means is that index funds will always go up in the long term.
Besides stock market index ETFs, investment-grade bond ETFs are also a good investment choice.
It’s safer and less volatile compared to index ETFs, so it’s good to include investment-grade bond ETFs in your portfolio.
So far, I have said a lot of good things about ETFs.
What about stock mutual funds and bond mutual funds?
Should you invest in them too?
The short answer is to STAY AWAY FROM mutual funds.
Mutual funds are generally professionally and actively managed by fund managers.
But, research has shown that more than 90% of fund managers CAN NOT beat the market.
In other words, you are better off putting your money in passively managed index ETFs that closely tracks the stock market index return.
What’s more, mutual funds charge higher fees (typically 1 to 1.5%)
Compared to mutual funds, ETFs have much cheaper fees which are less than 0.5%.
That’s only about a 1% difference in fees, BUT this small 1% can significantly reduce your returns over the years.
Assuming that you invest $100,000 with an investment fund for 20 years with a 4% annual return, let’s see how much a small percentage increase in annual fees can reduce your portfolio value.
0.5% annual fees reduce your portfolio value by $10,000 compared to a portfolio with a 0.25% annual fee.
Let’s put this in perspective.
$10,000 is 10% of your total investment value.
So, a 0.25% increase in annual fees costs you a 10% decrease in your investment portfolio.
1% annual fees reduce your portfolio value by nearly $30,000, compared to a portfolio with only 0.25% annual fees.
$30,000 is 30% of your total investment value.
Let’s put this in perspective, too.
So, a 0.75% increase in annual fees costs you a 30% decrease in your investment portfolio.
My advice for you is that STAY AWAY from mutual funds and ONLY invest in stock market index ETFs with very low all-in annual fees (i.e. expense ratios)
So, how and where do you buy market index ETFs?
One of the most reputable ETF providers is Vanguard.
Once you open your investment account with any stock brokerage or investment apps, you should be able to find ETFs in the investment products they offer.
Now, how much should you invest?
Should you invest a lump sum?
Or should you invest a small fixed sum at a regular interval for a period of time?
If you have a large amount of money to invest, it’s good to invest a lump sum at the beginning.
No one knows whether the market is going up or down, so it’s better to stay invested in the market at all times than to stay out of it and miss out on the bull run.
What if you don’t have a big lump sum like $10,000 or even $100,000?
It’s okay too.
What you can do is set aside a fixed amount of money every month to put into your investment account.
A lot of people have the misconception that you need a lot of money to get started.
But, that’s simply NOT true.
There are a lot of investing apps that allow you to start with as little as $5.
But, then you might say,” Gladice, investing $5 a month is not going to make me rich.”
In fact, $2745.72 is exactly how much you will get if you invest $5 a month for 20 years, assuming an 8% compound interest.
That’s not going to help you much if you are investing for retirement or want to grow your wealth.
But, that doesn’t mean there is no point to start investing with 100 dollars a month.
So, let’s look at how much you will have if you invest $100 per month for 20 years.
And here’s how much you will have if you invest $200 per month for 20 years.
Now, let’s look at another example.
Let’s say you start investing at the age of 21 and you invest $2,000 every year for 20 years.
Assuming your investment grows at 8% annually and you reinvest any profits (i.e. dividends or interest income from your investment), you will have turned your $24,000 into $471,358 by the age of 67.
That’s about a 2,000% return on your initial investment!!!
Now, let’s look at another scenario.
Let’s say you ONLY start investing at age 47 and invest $2,000 every year for 20 years.
Assuming your investment grows at 8% annually and you reinvest any profits (i.e. dividends or interest income from your investment), you will have turned your $24,000 into $59,295 by the age of 67.
If you had started investing 26 years earlier, you would have made $400,000 more.
So, you can see what compounding can do for you and your investment and why starting investing early is so important.
But, that’s NOT to say that if you are already in your 30s, 40s, or 50s, there is no point to start investing.
All the more, you should start investing as soon as possible.
Recommended Resources To Help You Make Money In Stock Market
So, to make money from the stock market, you first need to know what good stocks you can invest in.
But, no one can possibly scan the entire stock market for good investment opportunities because you simply don’t have the time. (by the way, there are close to 4,000 stocks listed on US stock exchanges alone)
Also, there are always other people who have more knowledge and experience in a particular industry than you, so you would probably miss some great stock ideas that are hard to discover on your own.
Below is the performance comparison between Motley Fool Stock Advisor and S&P 500 between 2002 and 5th September 2023.
As of 5th September 2023, average Motley Fool Stock Advisor recommendations have returned over 510% since inception while the S&P 500 has returned 132%.
In short, the Motley Fool Stock Advisor has outperformed the market 3 to 1.
But, what about its individual stock picks?
This metric is important because I might not be buying every single stock recommendation made by the Motley Fool Stock Advisor.
Below is a table that shows you the performance of individual stock picks over the years.
As of 6th September 2023, Motley Fool Stock Advisor has had 173 stock recommendations with 100%+ returns.
[Past performance is no guarantee of future results. Individual investment results may vary. All investing involves risk of loss.]
So, how much does Motley Fool Stock Advisor cost?
Its annual membership is usually priced at $199 a year.
Right now, there’s a special limited-time $79 offer* for new members for the first year when you click the link here to try it out for 30 days with a Membership-Fee-Back Guarantee. (*Billed annually. Introductory price for the first year for new members only. First-year bills at $79 and renews at $199)
So, for $79 a year- that’s just $1.60 a week – you can gain unlimited access to their library of expert stock recommendations which are carefully selected to help you grow your wealth.
Recommended Investing Apps To Get You Started Investing Wisely
M1 Finance (FREE)
M1 Finance is an investing app that allows you to invest your money and grow your wealth the way you want, for free.
With M1 Finance, it gives you the freedom to either build a custom portfolio of the stocks and funds you want or choose from more than 80 expert portfolios.
If you are just starting out and don’t have a lot of money to invest, it also allows you to buy fractional shares.
The best part about M1 Finance is that it helps you automatically rebalance your portfolio, so you never have to worry about placing manual trades again.
So far, there are over 100,000 people who are using M1 Finance to help them manage a total combined asset of more than $1 billion.
While there are other robot advisors such as WealthFront and Betterment out there, they all charge an annual advisory fee of 0.25%.
For M1 Finance, it’s completely free.
Are there other hidden fees?
No, there are no other fees that you need to pay:
- No additional trading fees ( i.e. no additional transaction fees to buy and sell securities)
- There are no additional fees for depositing or withdrawing from your account
- They rebalance your portfolio automatically at no additional cost to you
Its investing app is also easy to use with an excellent rating of 4.6 of 5 stars based on thousands of customers.
You can download it both from the Apple app store or Google play.
Is your money safe with M1 Finance?
Also, the money in your M1 Finance Spend checking accounts may be insured for up to $250,000 by FDIC insurance.
Lastly, it’s a technology-first company that utilizes the latest in information security.