Equities. Shares. Dividends. Asset classes.
Investing is filled with unfamiliar terms. You’ve heard how risky the stock market is. You know you have to put your money in the right places at the right time.
“People can be paralyzed even before they start,” said David Wilson, a certified financial planner at Watts Capital in New York.
One reason is the lack of financial literacy. “It’s not really addressed in the schools,” said Wilson, who is also the founder of Planning to Wealth in New York. People start with limited knowledge, and they’re not used to talking about money.
The good news is, you can keep it simple. “Stick to investing basics,” Wilson said. “Develop an overall plan, keep expenses low, diversify, rebalance.”
And don’t forget the last fundamental: “Ignore the noise, and avoid market timing,” Wilson said.
There is no best time to invest, or right stocks to pick. Here’s all you need to know to invest for wealth, no matter how young you are or how small your salary.
Pick a method
If the options seem dizzying, Wilson says there are three main ways to invest. “Spend the time and do online research,” he said. Then pick a provider and open your account.
Or try an online platform, aka a robo-advisor. Wilson touts the low minimums, streamlined process and consumer-friendly dashboards. “It’s a less intimidating interface than major [provider] platforms,” Wilson said. “There’s great appeal to answering five to 10 questions, and having your account opened.”
Those questions help you understand your tolerance for risk and pick an appropriate asset allocation, or what to invest your money in.
Or go to an actual in-person advisor for customized advice.
Dig a little deeper and you’ll find you understand most of what the experts are talking about.
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The fact is, over long periods of time, investing your money means it will earn more. And, says Wilson, “given that prices increase every day because of inflation,” you’ll need more to meet prices.
“The market is rigged [in favor of] people who can invest for long periods of time,” Wilson said. And that’s a good thing if you’re younger. But even if you’re in your 40s, that still gives you a couple of decades to build some wealth.
What’s a stock? A bond?
When you buy stock, he says, you now own a fractional share of a company. That partial ownership doesn’t obligate the company to give the holder anything. You simply own a percentage of the company.
You do, however, have the right to potential earnings from that company. “You can make money in two ways,” Wilson said. “From dividends, or you could sell that sheet of paper for a higher amount because people think the company’s earnings prospects are favorable.”
For bonds, Wilson writes down the amount of money you’ve put in, and the interest rate. “It’s an IOU from the company, and it trades on the market,” Wilson said. “You have the right to get money from me, and at any time you have the right to sell that sheet of paper to someone else.”
The interest rate is set when the bond is created. If rates increase or decrease, “that piece of paper can fluctuate in value,” Wilson said.
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You’ve got this
Doug Nordman retired at 41 after 20 years with the Navy’s submarine force. His personal finance blog helps service members navigate their finances. Though he was a disciplined spender and always saved at a high rate, he was a complete novice when it came to investing when he had his first job.
In the beginning, just about everything was confusing. “I had no idea about the basics of starting a 401(k) or IRA or a taxable account,” Nordman said.
People who feel overwhelmed and don’t know where to start shouldn’t worry about everything.
Focus on the things you can control, like using automatic deductions so you invest regularly, Nordman says.
“We see again and again, people who save automatically save the most,” Wilson said.
When it comes straight out of the paycheck, you don’t have a chance to spend it. “Instead of making a saving decision every month, make it a couple of times a year,” Wilson said. “We encourage people to experiment with different automation levels.”
If your paycheck feels too slim, ramp down your contribution a bit.
“There’s never been a 15-year period where the stock market hasn’t gone up. Within that period it will have ups and downs,” Wilson said.
Be patient. With a long time horizon, you’ll get a higher return than if your money sits in the bank.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.