Investing can be overwhelming when you are starting out. But learning to grow your wealth through investments is a skill that can propel your finances to a whole different level. Here are a few basics every investor should learn to build wealth for a comfortable retirement.
You have to invest to secure your future lifestyle. Unless you are willing and lucky enough to be able to work until you drop, compounding your wealth is the only way to get to a secure retirement. The good news is that your investments will build wealth on your behalf over time. With a solid understanding of how markets work, you can let your money work for you to create the retirement of your dreams.
You can start investing with little money. New innovations are making it cheaper and easier to start investing, no matter how much money you have. Many people start investing with just a few hundred dollars, so there are no excuses for failing to save at least a small portion of each paycheck. Don't delay saving, because compound interest will help you more the longer you invest your money. Plus, starting earlier means you have more time to fix and recover from mistakes, and you will have less to lose on these potential mistakes if you make them earlier in your career.
Decide how much you can invest each month. A successful wealth builder continually invests and saves throughout his career. That's because your savings rate is the investment factor you have the most control over. One efficient way to save is to treat contributions as an expense. Paying yourself first really works. Figure out how much you can put away for the long term, and then set up an automatic deposit of that amount into an investment account the day your paycheck hits your checking account. This way, you won't have any excuses not to deposit the money for the future.
Scrutinize investment expenses. Costs matter a great deal. From high fee funds to brokers who overcharge to make trades for you, there are many opportunities to pay less to own exactly the same investments. You could find an exchange-traded fund that tracks the same index with a lower expense ratio or another broker charging cheaper fees to buy and sell the same stock. Always be on the lookout for cheaper and simpler options, since technological innovation is constantly making investing cheaper and more efficient.
Learn the basics of index investing first. There may be some people who can beat the markets over the long term, but almost everybody who tries ends up underperforming the benchmark indices. And even if you manage to beat the index, there's a high chance you spent too much time worrying about market movements when you could have gotten a higher return working a part-time job. Active investing can be sensible for a select few people, but index investing is typically easier and cheaper. Be realistic about what is best for your situation.
Think long term. Many people are scared to invest in equity markets because of seemingly random price movements. Short-term valuations are unpredictable, but long-term values will always track long-term profitability of the companies in the market. That's what you can count on when you take the risk of owning stocks. Short-term investing may be a big gamble, but long-term investing is a solid vehicle to build wealth as long as you can stay the course when valuations inevitably fall and the media is scaring everybody out of equities.
Just get started. You can hesitate to invest for years and end up missing out on the beauty of having money work for you. There are certainly many pitfalls to avoid when it comes to investing, but you will be well rewarded for prudently staying in the markets for the long haul. The hardest step to take is to start saving. Once you begin tucking money away you can learn about investments as you go. If you manage to stay the course for long enough you will prosper.
David Ning is the founder of MoneyNing.com.
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