Learning how to invest is essential to building wealth
You’ve got your debt paid down, your emergency fund in place, and your short-term savings account is starting to grow. If this sounds like you, then it might be time to start thinking about investing as the next step.
Responsible investing can be a great way to build wealth and achieve your financial goals. The most important part is choosing the right products for you. The goal is to earn a positive return while protecting yourself from major losses. So, how do you really protect yourself when investing
Diversify your investments
As you become more informed about the different investment options, you will probably develop a few favorites. Some may sound more exciting than others, but you should avoid investing all your money in one place. Diversification is key to protecting yourself against major losses. For example, if you make a few high-risk investments in some of the new technology startups, you should also make investments that are lower-risk to help offset potential losses. Bonds, CDs, annuities, and mutual funds are great examples.
Focus on making low-risk investments
Evaluate your risk tolerance. Diversifying investments is ideal for some investors. However, if you have an extremely low risk tolerance, you might consider investing most of your money in low-risk investment products. Making safe investments over a long period of time can give you both peace of mind and a healthy return. U.S. Savings Bonds and municipal bonds are both backed by the government and are low-risk options. CDs and Mutual Funds are other low risk products to consider. Understand that low-risk investments have lower yields, but slow and steady can be a valuable strategy for some investors.
Choose long-term investing over short-term
Spreading your investments out over time provides more opportunity for growth. Putting your money in an investment for one year vs. ten can be the difference between earning a $7,000 return vs a $200,000 one. As the value of your investment grows, so does the amount by which it increases. Consider how compound interest affects high-yield savings accounts. As interest accumulates on your balances, you earn more interest on the interest you’ve already earned.
Watch out for inflation
When inflation strikes, your portfolio can take a major hit. Rising rates can devalue the investment principal and reduce your purchasing power in the market. That doesn’t have to be the case with Treasury Inflation-Protected Securities (TIPS). With TIPS, the principal value of the security rises and falls in proportion to inflation, thus protecting you from changes in the consumer price index. Interest is paid twice a year, and they are backed by the US government.
Establish a trust fund
Setting up a trust fund is a great way to protect your investments. To get started, you will select a trustee to manage the trust on your behalf. A trustee can be an individual, an institution (bank or trust company), or a combination of the two. Trust funds can hold most assets, including cash, investment accounts, stock, and real estate. You decide how you want your assets distributed with as many restrictions as you wish. This ensures that when the time comes, all your assets are transferred to the right people. A trust can also help reduce tax obligations and probate expenses, leaving more of your money intact.