Investing is the purchase of an asset or item with the hope that it will generate income or appreciate in the future. An investment is the action or process of investing money for profit or material result. Investing can include buying stocks, bonds, commodities, mutual funds, real estate, currencies, classic or antique cars, antique furniture stamps, coins or other collectibles.. Investing have risks and rewards.
“The rich are different from you and me.” (F. Scott Fitzgerald) “Yes, they have more money.” Hemingway) This legendary exchange between F Scott Fitzgerald and Ernest Hemingway actually never occurred! Does it matter? My focus is how to become rich or wealthy through investing. The rich already know how to make it and the rest of us are just striving to reach it. It starts with finding something that will appreciate over time to create wealth. Before 2008, it was real estate and post 2008, it is still real estate.
Real estate is not the only way to accumulate wealth. Whether it is your home or income property, real estate is a great hedge against inflation. Better yet, it is one of the very few investments that you can leverage at very low interest rates and even get a tax deduction. Unfortunately, real estate requires a sizable down payment (generally 20%) for a single family residence or condominium. Thanks to the lower than normal interest rates, housing prices are higher. It leaves out a sizable group of people!
Most people can invest t in the stock market. Typically stock market investments are not leveraged (without financing) and the entry threshold is considerable lower. You can buy as little one share or invest in mutual funds. The key to investing in the stock market is contributing on a regular basis, preferably ten (10) percent of you income. You can contribute less and still accumulate a sizable nest egg over time. You can buy stocks, bonds, mutual funds, commodities, or Exchange Traded Funds (ETF).
Your investments can be held in a brokerage or retirement accounts (deferred). In a brokerage account, you pay taxes based on dividends and capital gains as they are earned (annually). Retirement accounts defer taxes until you withdraw the funds usually in retirement. In a retirement account, you have the advantage of tax deferred appreciation, although it is ordinary income when you withdraw it. Taxes (capital gains) may be lower in a brokerage account, but you pay it annually.
Investing has its risks and rewards! You can lose money in the stock market. I think it is one of the reasons so many people sit on the sidelines and avoid investing in the stock market. There are conservative investments in the stock market that are overlooked every day. You can invest in United States Treasury, corporate, municipal, government or utility bonds. These are investments that have very specific risks. If you buy a bond and hold it to maturity, you have virtually no risk of loss of capital and you earn interest.
Bonds are rated in terms of risk. In broad terms, there is investment and speculative (junk) quality bonds. The risk is usually reflected in the interest rate. If you want to accumulate wealth, you should learn about investing before you decide to buy bonds or any other investments. My first investment was bonds. I used it as an introduction to investing in the stock market. Some people use mutual funds as their introduction to the stock market. The advantage of mutual funds is diversification.
Keep it simple stupid (KISS). Investing does not have to be difficult. You can make it as simple or as complicated as you want. You can spend hours/weeks/months analyzing every investment choice or you can invest in a large diversified mutual fund such as the Vanguard Total Stock Market Index. It was designed to provide investors with exposure to the entire U.S. equity market, including small, mid and large-cap growth and value stocks. You get low cost, broad diversification, tax efficiency and volatility.
This is a great way to get into the stock market! You get broad exposure to the stock market and all you have to do is meet the fund minimum of three thousand dollars ($3,000). If you invest ten percent of your earnings in the stock market, you will probably exceed this minimum in less than a year. If you establish a retirement account, your contribution is tax deferred. For a ten year period, the return on investment (ROI) is 8.74%. Since 1992 (inception of the fund), the return on investment is 9.58%.
I recently presented the power of compounding in my economics class. If you invest as little as three hundred dollars ($300) per month, 7% ROI, for ten (10) years you would accumulate fifty-one thousand three hundred sixteen dollars ($51,316). Not bad considering you only invested thirty-six thousand dollars ($36,000). Increase the time to thirty (30) years, it jumps to three hundred fifty thousand eight thirty-six dollars ($350,836) and you only invested one hundred eight thousand dollars ($108,000).
Investing can be very intimidating, but it does not have to be! Keep it simple as you learn about investing and you earn while you learn. You start investing in a retirement account when you start you r first job after college and contribute ten percent (10%) of your earnings into a broadly diversified fund and start the process to learn more about investing. You probably will buy your first home or condominium before you are thirty (30) years old. You are starting to diversify your portfolio. Investing takes time and effort!
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