What the Heck is Investing Anyway?
What is Investing?
Merriam-Webster defines investing as:
Committing money in order to earn an expected financial return
Investing is the #1 most effective way to become rich.
Just by opening an investment account you gain access to the largest moneymaking vehicle in the world, the stock market.
When you invest you make a conscious choice to direct your hard earned money into a product (stocks, bonds, mutual funds) expecting a level of return based on the past performance of the particular product.
Compound Interest
Part of the beauty of investing is the miracle of compound interest.
Ben Franklin called it the "eighth wonder of the world". It doesn't take a genius like Ben Franklin to see why.
Compound interest allows the value of your investment to grow exponentially over time as you let the money continually earn interest on itself.
The return gets bigger with each passing year.
With compound interest, that $1,000 you save this year can become $2,839 in just 10 years.
When you don't touch the investment you allow time to do its thing.
You can turn $1,000 into $10,000 without lifting a finger.
If a 20 year old puts $1,000 into a mutual fund returning an average of 11% per year, by the time she turns 50 that money will have grown to $22,892.
If she had waited until she was 30 to start investing she would have only $8,062.
See what a difference just 10 years can make.
So, don't mess around.
If you haven't already started investing, start investing now!
Compound interest is by far the best way for you to reach your retirement and investing goals.
Asset Allocation
Deciding how much of you money to place into each asset class is asset allocation.
This is how you match your portfolio to your goals and timeframe.
If you're one year from retirement you might invest more heavily in bonds and cash (CD's, money market, etc.).
If you're 30 years from retirement, cash should be a very small part of your portfolio and stocks should be the main asset class.
Paper loss - When you buy a product and sell it at a loss you "realize" the loss. When the price of a product you previously bought has gone down but you haven't sold it yet, it's called a "paper loss".
This is what buy-and-hope investors rely on, shrugging off their portfolio losses and saying, "Oh it's just a paper losses." I'm calling shenanigans on that one. If you needed the money today or tomorrow it's not there. I'd call that a real loss!
Gurus
Don't rely on gurus; rely on your own research and knowledge.
Make your own choices. Don't be the clueless follower of some guru on television. Learn about the financial markets, how they work, the various products available, and risk levels.
For more information on investing visit my site below.
What the Heck is Investing Anyway?
By: James Fowlkes
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