‘Investing’ means taking an existing asset, usually money, and using it to earn financial returns. Here’s what to know about making ‘good’ investments, managing risk and losing money. The world of investing can be baffling for beginners of any age. An understanding of a few simple terms and concepts can make it possible for anyone to become an investor. What is investing?
The word “invest” can have broad connotations, as dictionary definitions make clear: You might be invested in your children’s lives, perhaps you recently invested in a new car, new business, home renovation, or you consider your education an investment in your future .
But from the point of view of investing. This is different from saving, which is simply putting money aside. The difference is often that investing carries a calculated amount of risk – though, of course, there have historically been cases where cash is also high-risk, such as in hyperinflationary societies like Germany during the Weimar Republic. What can be considered an investment?
A lot of things can be considered an investment. Whether they’re a good investment is the question. Common investments include stocks, bonds and real estate, all of which can be purchased directly or through a tool such as a mutual fund or exchange-traded fund (ETF). Cryptocurrency is another kind of investment that has gained popularity of late . Some people who are self-employed have a lot of assets in their business, which is also a type of investment. And then there are the oddball so-called investments that are lucrative for some, until the whole structure crumbles: Think Beanie Babies in the 1990s. Why should you invest?
It’s a good idea to save money for the future. You will probably need that extra cash down the line to cover costs owing to low cash flow from losing your job, or toward a big purchase like a home, or for your kids’ education and retirement. The fewer savings you have available, the more likely you’re going to have to go into debt when sudden expenses arise.
And while having some easily accessible cash on hand is smart, you don’t want all your savings to be hundred-dollar-bills under the mattress, figuratively or literally. Standard bank accounts pay paltry, if any, interest these days, and even the best high-interest savings accounts offer rates that are significantly below inflation. That’s fine for an emergency fund that you might need to dip into sooner rather than later. But for longer-term savings, inflation means that any cash you have put aside is going to lose a lot of value. A dollar doesn’t buy what it used to, and it’s going to buy even less down the road.
That’s where investing comes in. The goal with investments is that your money will grow faster than inflation, meaning it’ll have more buying power when you take it out than when you put it in. It doesn’t always work out that way, but that’s the general idea.
There are some guidelines on when and how much to invest, but it also depends on your personal situation. For instance, women tend to live longer than men and are more likely to have gaps in their earning years, so their retirement plans should be tailored to that reality.
An important thing to keep in mind is that time is your friend when it comes to building wealth. As columnist Tim Cestnick points out, even starting just five years earlier can have a huge impact on the value of your investments over time. A good investment is one that you can be confident will work out for your financial needs. A ‘diversified’ portfolio is a mix of stocks and bonds or guaranteed investment certificates that reflect your age, risk tolerance and financial goals. Creating a diversified portfolio What is considered a ‘good’ investment?
It doesn’t need to be flashy, or a “hot stock tip,” or a particular asset class, like real estate, which many who own it claim is failproof. Instead, a good investment is one that you can be confident will work out for your needs.
Investors should keep in mind that it’s easy to get caught up in hype and trends, notes investment consultant Darryl Brown. “The industry thrives on pushing the emotional envelope and trying to convince investors that this is a game that can be played – and played to win,” he says. “If we let the hype get to us, we’re the ones getting played.”
Brown suggests learning about behavioural finance , which […]
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