If you have a few extra dollars lying around in your budget after you pay all your bills and do some basic saving, you may be wondering what to do next. You may even hear your friends or colleagues talking about investing, but you might not know where to start. I’m here to help. Now I’m not going to give you specifics about which investments to choose. But I will provide some guidelines for investing as well as some examples of different ways of investing money.
Taxable vs Tax-Advantaged Investing
The first thing you might want to know about investing is that there are two major categories of investing: taxable and tax-advantaged.
Tax-advantaged investing uses some type of tax related retirement account (or retirement “savings vehicle”), which encourages you to you save for retirement by helping you avoid taxes.
If your goal for investing is a comfortable retirement, and thus, you don’t need the funds till you retire, then you should strongly consider a tax-advantaged account. Common accounts to choose from are the 401k and the IRA.
Taxable investing is anything other than tax-advantaged investing. If you don’t open up a special account to invest in, then you are just doing normal taxable investing. Taxable investing is very flexible since there is no special account to hold the funds in. You can move your money in and out as you please.
Most investors do a combination of both. Invest the maximums into their tax-advantaged accounts each year, and then start pouring money into taxable investing.
Diversified vs Speculative Investing
Another concept you should learn about before investing is the idea of diversification. This is the act of putting your investment dollars in multiple assets to achieve proper asset allocation. There’s lots of debate as to what that looks like. But the idea is to spread your money around so that if one investment fails it won’t wipe out your whole portfolio, yet you’ll still achieve decent results.
Therefore, diversified investing, involves putting your money in several different asset classes, and seeking a modest return without great risk.
Speculative investing is a little harder to define. But like explicit or objectionable material, you know speculation “when you see it”. Speculation is putting your money into assets where their is a lack of knowledge about the investment, a high level of risk, or simply where you have too much of your portfolio in one asset class. Some could argue that all stock investing is speculative. But for simplicity sake, I’m defining it this way.
The bottom line is that if you want to seek a decent return over the long-haul and preserve your capital (i.e. hold on to your money), you should be involved in diversified investing, and not be a speculator.
Different Types of Investments
Armed with the knowledge of these investing subjects, you’re ready to go out and start investing. But where should you put your money? Here are some of the most common investment types (or asset classes) for you to consider.
- Stocks – Buy stocks of ownership in a company. Your investment grows as the company performs well.
- Bonds – Buy a debt security from a company or organization. You get paid when they pay their debts.
- Cash – Buy into currency, money market funds, and CDs. Your money is stable and most of the time insured from loss.
- Funds – Buy groups of stocks or bonds called funds. Common funds are mutual funds and index funds.
- Real Estate – Buy land. A real asset you can put your hands on.
- Businesses - Buy equity in a business. You get paid as the business grows.
- Personal - Buy an education, a new suit, or a car to get you back and forth to work.
- Other Assets – Buy art and collectibles. Hang your investment on the wall.
- Commodities – Buy gold, silver, or platinum.
Which combination of the above you choose will depend on your understanding of the types of assets and your personal risk tolerance.
How do you invest your money? What strategies do you use? Which asset classes do you invest in and why?