How to invest money: The basics to get started

In a nutshell

Investing money is a key way to build wealth. There are several key factors to consider when investing.

• Determine your budget for investing.
• Define your investing goals and your risk tolerance.
• Determine your investing time horizon.

Determine your budget to invest

The first step in the investing process is determining how much you have to invest. Investing budgets can be large or small. Perhaps you want to invest $100 or $250 each month. This can be as easy as setting up an automatic investing program into one or more mutual funds or even into some individual stocks. Over time you can increase this regular investment and you can buy or sell investments as your portfolio grows in size.

If you have access to an employer sponsored retirement plan such as a 401(k) this is an easy and painless way to invest each pay period. You specify an amount, generally a percentage of your salary, that is to be withheld and then invested into the plan based on the fund choices that you have specified. You can change the amount invested each pay period as well as the funds to be invested in as often as you like.

Many established investors might have larger sums to invest. New money might come from a workplace bonus or from selling a large investing position and needing to reinvest the money. If you have a larger amount, you can invest in a range of investments. This allows you to diversify your holdings, which is a key way to reduce risk when investing. In making this type of investment it's important to review your goals for your investments and how this new money fits into your overall portfolio alongside any existing investments.

In other cases, you might have a large amount to invest or already invested. Perhaps you are leaving an employer and need to invest your 401(k) account into an IRA rollover. First, you will want to look at your desired asset allocation and decide how you want to invest this money. You would then move forward and invest the money in stocks, bonds, ETFs, mutual funds, cash or other types of investments.

Set goals

Before investing it's important to set goals for your investments. What are you investing for?

Goals might include saving for retirement, a downpayment on a house, college for your children or any number of other goals. It's fine to have multiple investing goals as well. In some cases you might have a separate account for separate goals, or you can combine investments for several goals in one account.

When setting an investment goal, be sure to give some thought to the amount you are trying to accumulate and when you will need it.

If your savings goal is a college education for your children then the age at which the money will be needed is pretty well set. However, a goal such as retirement might not be as exact. Retirement age can vary and your retirement savings will need to last for a number of years while you are retired. Investing simply to accumulate wealth for no specific purpose is perfectly fine as well.

It's also important to set goals for your investment returns. While nobody can predict what your exact returns will be over any particular time period, your investing goal might be to match some percentage of the return of a market benchmark like the S&P 500. This return goal might depend on the level of risk that you are taking relative to the risk of the index.

Determine your risk tolerance

It’s important that you think about your risk tolerance. Risk can have a number of definitions, but the risk that matters to most investors is the risk of losing money. Essentially, risk tolerance refers to the amount you feel you can afford to lose during the inevitable stock market corrections.

Your risk tolerance can be influenced by your age, your goals and your investment time horizon. There are a number of online calculators that can help you determine your own risk tolerance, and major online brokers generally offer these types of calculators on their sites.

Risk tolerance often varies by age. Younger investors with a long time horizon until retirement can afford losses along the way, since any short-term losses will eventually be canceled out by long-term gains.

Select your investment vehicles

There are a number of investment vehicles that investors can choose from, including the following.

Stocks

Stocks represent ownership in a company. Stocks are traded daily on the stock exchange. Investors in stocks are hoping their shares will increase in value over time, and some stocks offer dividends which are a quarterly distribution from the company to shareholders.

Stocks can represent companies in a wide range of industries including technology, energy, industries, service industries and a host of others. Stock can be issued by large companies, mid-sized companies and smaller companies. Both U.S. and international companies issue shares as well.

Bonds

Bonds are a debt instrument issued by companies, the U.S. Treasury, other government agencies, and state and local governments. Bonds are a way for these companies and governmental units to borrow money.

Bonds are issued for varying terms that can range from a few months out to 10, 20 or 30 years. Bonds will typically pay interest on a semi-annual basis. The interest rate paid by a bond will be a function of a number of factors including the prevailing level of interest rates at the time of issuance, the time until maturity and the risk of the bond issuer.

Bonds and other debt securities issued by the U.S. Treasury are considered risk-free debt. Corporate bonds are assigned debt ratings by the various agencies, based on their financial strength and other factors.

Bonds held until maturity will receive their face value. Bond prices can fluctuate over time primarily based on the movement of interest rates, and move in the opposite direction to them. That is, when interest rates increase, bond values decrease.

Mutual funds

Mutual funds pool investors’ money together in a professionally managed fund that might invest in stocks, bonds or a mix of investments.

Some funds are actively managed: the managers make affirmative decisions about which securities to hold and which to sell. Others, like index mutual funds, are passively managed. This means they passively try to emulate the performance of an index benchmark like the S&P 500. Mutual funds might invest in sub-asset classes such as growth or value stocks, small cap stocks, non-U.S. stocks, short-term bonds or a multitude of others.

Investing in mutual funds can make portfolio diversification easier in some cases. Investors can select funds that correspond to certain asset classes, instead of trying to mix and match individual stocks and bonds to achieve the desired level of diversification.

ETFs

ETFs, or exchange traded funds, are similar to mutual funds in that they are also professionally managed funds that pool investors’ assets to invest in stocks and bonds of various types, as well as other types of investment assets. Unlike mutual funds, ETFs are traded in a similar fashion to individual stocks, which is daily on the stock exchange during its open hours.

ETFs tend to be passively managed index funds, though active ETFs are becoming more prevalent. ETFs also tend to be more tax-efficient than similar mutual funds.

Real estate

Real estate as an investment can take many forms. You can buy an investment property such as a home, a duplex or an apartment building and rent out space in the property. You earn rental income and later on you can hopefully sell the property for a profit.

Real estate investment trusts (REITs) invest in a variety or real properties or in some cases mortgages. REITs are professionally managed and investors make returns from dividends that are paid and then from hopefully selling the REIT at a profit.

The AP Buyline roundup

Investing money is an important way for people to build wealth. Before you invest, whether a small sum or a larger amount, be sure to have a plan. What are your goals for this money? What is your risk tolerance? How will you invest the money?

Investing is not a one-size-fits-all proposition. Be sure to seek professional help as needed. This might be through a robo advisor like SoFi Automated Investing or a human advisor such as those that can be found via the WiserAdvisor site.

Investing is also not a set it and forget it activity. Be sure to review your investments as well as your own investing goals periodically to ensure that you are on track.