Embarking on Your Investment Journey: A Fundamental Guide for Novices
In high school, where you sat at lunch was all about social status. Athletes claimed one table while geeks gathered on the other side. This dynamic made movies like “She’s All That” so relatable—they captured the dream of breaking free from obscurity and finding social success.
As adults, we often feel like we’re in a metaphorical cafeteria, wishing to join the ranks of the financially savvy while being stuck at the table of poor money managers. But here’s your chance to change that with this guide to finance, inspired by “She’s All That.” This article is designed to introduce you to the basics of investing, aiming to make you knowledgeable enough to hold your own in social or financial circles. You might not become an investing expert by the end, but you’ll be ahead of about 52% of Americans who don’t invest in stocks at all.
**WHO SHOULD INVEST?**
The answer is simple: Everyone. No matter your future plans, living comfortably in retirement requires more than just stashing your paycheck in a savings account. Savings alone won’t keep up with inflation, pushing you to save more than you spend—a tough balancing act. Investing helps your money grow, offering better returns than traditional savings through the stock market.
**WHEN SHOULD YOU START INVESTING?**
Understanding the importance of investing doesn’t mean you should rush into it. First, make sure you’ve covered two essential bases:
1. **Have Disposable Income**: Investing shouldn’t feel like gambling. Don’t compromise your ability to pay bills or risk falling into debt just to invest. If you have debt, it’s wise to clear that first (although contributing to a company’s 401(k) might be an exception since skipping it means missing out on employer matching).
2. **Have an Emergency Fund**: Without a financial cushion for unexpected expenses, like car repairs or medical bills, you might invest too cautiously, missing potential gains. Aim to save enough to cover 3-6 months of expenses before diving into investing.
**HOW TO START?**
A workplace retirement plan is often the easiest way to begin. If you’re self-employed, explore resources on retirement planning. Once you’re comfortable, consider other avenues like brokerage firms.
**INVESTING 101: TERMINOLOGY**
Before jumping in, learn these key investment terms:
– **STOCKS**: Buying stocks means owning a part of a company, and your investment grows as the company succeeds.
– **BONDS**: Bonds are loans you give to companies or governments, with promises of repayment and periodic interest.
– **COMMODITIES**: These are basic goods like agricultural products with prices set globally and slightly adjusted based on industry use.
– **MONEY MARKET**: This involves investing in financial instruments like Certificates of Deposit.
– **MUTUAL FUNDS**: Professionally managed funds that pool money from multiple investors to invest in various securities.
**6 FUNDAMENTAL INVESTMENT PRINCIPLES**
1. **BUY LOW, SELL HIGH**: Purchase undervalued stocks and sell once they’ve gained value for better returns.
2. **RESEARCH**: Base your investment decisions on thorough research of all influencing factors.
3. **INVEST IN WHAT YOU KNOW**: Familiarity with an industry can help identify winning investments.
4. **INVEST FOR THE LONG TERM**: Staying invested during market dips often leads to better outcomes than selling in panic.
5. **DIVERSIFY**: Spread out your investments to minimize the risk tied to any one asset.
6. **BE YOUR OWN INVESTOR**: Make decisions based on your own research, not just current trends.
Investing always involves risks, but smart investing can lead to significant gains. Fear of the unknown can be intimidating, but once you learn how to navigate investing, don’t forget to invite someone to join you at the investor’s table!
Reflecting on your own experience, what was most confusing when you first started investing? Have you avoided investing before? Are you participating in a 401(k) plan?
