That’s the big question. We, as a country, are people in debt. Consumer debt sits at an average of about $6,000 per person, and student debt is about $30,000. That’s a problem because debt prevents many from investing. That’s a problem because people who start investing at a young age have more time to generate returns. In fact, 21% of millennials have invested less than $500 in total over their lifetime. Overall, 54% of 25- to 34-year-olds have invested less than $5,000, and only a small percentage—14%—have invested more than $50,000. Of course, it’s much more complicated than that. Certainly, age, income, ethnicity, family type, and education level are all factors.
Does it make sense to invest while you’re in debt? The short
answer: Maybe. As with most things of a financial nature, it’s
highly individual. Overall, there is a rule of thumb to follow
when deciding to pay down your debt or invest and it’s super
simple: if you stand to earn more in returns than you’ll pay in
interest on the debt, then yes.
Financial education comes with a whole new vocabulary to learn. Here are a few basic terms that you’ll see pop up over and over again.
There are two main ideological investment styles. They each have their pros and cons and will appeal to different investors, here they are:
Passive investing is an investment style that involves buying and holding assets for a long period of time. A favorite of long-term investors, this style means buying and holding in the hopes of growth. The average returns of investing in the stock market are much higher than with other types of investing, comparatively. A long-term mindset is essential when investing for growth and adopting a passive style.
This style involves researching industries and companies that have a record of doing well, even during tough economic times. Alternately, you could find companies on the cusp of progress and innovation who have yet to see their full potential. Passive investing is best for people who like minimal involvement and seek to earn long term wealth.
Active investing is an investment style that involves a high-touch take on the purchase and sale of your assets. Day trading is considered to be an active style of investment. It’s interesting to note that many day traders do not do well. A famous study by the University of California notes that “in the typical six month period, more than eight out of ten day-traders lose money.” So what’s the draw? Quick money.
This style involves lots of research, lots of hands-on work, and lots of potential profit. Instead of riding the gentle rise of the overall market, active investing seeks out the potential to exploit profitable conditions.
Generally speaking, active investing is best for people who
believe that managing their own money means they will beat the
average return of the stock market
Sometimes they’re called assets, products, or vehicles, but they all amount to all of the different ways for you to invest your money. Because investing is an inherently uncertain endeavor, understanding this and your tolerance for it is key in creating a workable investment plan. If you take on too much risk, you might panic and sell at the wrong time. Alternately, you could play it too cool and miss out on big gains in the market. Here are some asset classes listed from lowest to highest perceived risk:
Cash is the paper currency tucked in your pocket as well as the virtual funds in your checking and savings accounts. Cash is considered to be very low risk. The money you park in a bank account is protected by the FDIC for up to $250,000 and if anything happens, you will not be at a loss for those funds.
Because cash investments are so low risk they are in turn very low reward. The average savings account interest rate hovers at under 1%, which isn’t even enough to overcome inflation. However, many people are happy to give up the growth in exchange for access and security.
Cash investments are best for people who want super low risk and constant access. Whether it’s in your bank or under your mattress, you can generally rest assured that your cash is safe, but not giving much of a return, if any.
Bonds, sometimes called fixed income, are a way for the average investor to buy into debt. When you buy a bond you are loaning a corporation or the government money in order for them to pay off their debts or complete a project. In exchange, they will repay you over time with very meager returns. The returns are so slim because the bonds most certainly will be paid back, which makes them a very low-risk investment option.
There are three types of bonds: Treasuries, corporate, and municipal. Treasuries are backed by the full faith and credit of our U.S. government and there is little risk of default. Corporate bonds often carry a higher risk but generally offer higher potential yields. Municipal bonds sometimes offer higher rates but come with a bit higher risk because local governments can go bankrupt, though it doesn’t happen often.
Bonds can be purchased through a traditional brokerage or even directly through the U.S. government. Bonds are great for people who are near to their retirement age and want to even out their riskier investments with something more sound and predictable.
A mutual fund is a bundle of stocks, bonds, or other assets—so the risk associated is based specifically on what is in each individual fund and how well it’s balanced. There are specialty mutual funds that contain riskier investments, like emerging markets, to try and capture a higher return. As expected, these kinds of funds also tend to have a greater risk. Mutual funds are actively managed, meaning a fund manager makes decisions about how to allocate assets in the fund.
Mutual funds can be purchased directly from a mutual fund company, a bank, an online platform, or a brokerage firm. Investors who will access their money in more than five years time are the best candidates for mutual funds.
Even if you don’t know much about investing, the name S&P 500 probably rings a bell—it’s an index fund. An index fund measures the performance of a collection of securities, which is meant to represent a sector of a stock market. Some index funds track only companies of a certain size, while others stick to a certain sector. Like a mutual fund, its contents predict its risk level.
Index funds follow a passive investing path and generally are best for long term investors. You can invest in an index fund directly or through any number of platforms or a brokerage firm. Index funds are best for investors looking to round out their portfolios with a generally low fee fund that tracks overall market performance.
Electronically traded funds, ETFs
In the simplest terms, an ETF is a collection of securities that you can buy or sell through a brokerage firm on a stock exchange. A bunch of stocks are bundled together based on some underlying connection—say industry, performance, theme, or geography for example—and then assigned a ticker number and traded like a stock.
These function a lot like a mutual or index fund and, again, are only as risky as their selections. Because the minimum ETF buy-in tends to be lower than mutual funds, these can be a great option for new investors.
Over time, investments in stocks have given the highest average rate of return. Because there are no guarantees of high returns when you buy stocks, that makes them a strong risk. Historically and on average, the stock market has provided a 10% return to its investors who are well diversified.
Investing in stocks means to buy a small piece of a company in exchange for a portion of its growth when it (hopefully) does well. Stocks can be purchased from a bank, an online platform, or a brokerage firm. Investing in stocks is a solid option for investors who think they can turn a quick buck day trading and those with a long way to go before they plan to access their cash.
Alternative investment options
If an investment doesn’t fit into the
cash/stocks/bonds category, it is considered to be an
alternative investment. That can mean lots of things:
While these outside the box investments might seem like the
riskier option, they’ve historically pulled the same average
return as the stock market. Alternative investments can be a
great element of an already diversified portfolio for an
Once you’ve decided on your investing style and how you’d like to invest, the next step is to actually go do it. You probably know that you don’t stuff an envelope full of cash and mail it off to the NYSE, but you might not know your options.
If you are currently banking with a major financial institution, they may have an investment arm of their services that might work for you. Your funds are connected through your main banking accounts, which should make automatic investments seamless.
For investors who want a little extra guidance, an IRL financial advisor can work well. When you choose an advisor, be sure to go with a fee-only fiduciary advisor. By law, a fiduciary has to act with your best financial interests in mind, which is a relief if you’re new to the investing universe.
For investors who want zero interaction, there are automated investors who take over the whole process for you. Roboadvisors create portfolios and automatically invest your funds in alignment with your interests and goals.
A happy medium between an in-person advisor and letting the robots take over is an online investing platform. Typically, these platforms feature excellent user experience and are backed by professional fund managers, making them a breeze to use. One word of caution: the world of fintech (financial technology) platforms features a lot of new kids on the block. Be sure to research the platforms and see who is really backing their tech and handling their banking, ensuring that your money is safe.
Investments, like everything in personal finance are,
well...personal. Options abound and different methods work best
for different investors. The investing landscape has shifted
alongside technology and has moved away from people literally
trading slips of paper to the ability to trade stocks from your
pocket. The first step to successful investing is figuring out
your goals and risk tolerance, learning about investment
products, and changing your strategies as your lifestyle and
your goals change. You don’t have to stick with the typical
stocks and bonds, there’s an option for whatever feels right for
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