If you’ve ever wondered how people like Warren Buffett or Bill Gates really made their millions, it wasn’t just by starting their own firms. They invested.
Investing isn’t a way to get rich quick. It takes time, patience, and know-how. It requires you to analyze opportunities and make informed choices of where to place your money so it will work for you.
Unlike the tiny bit of interest you receive on a standard bank savings account, if you invest your money wisely – in things such as stocks, bonds, mutual funds, CDs, and real estate – it will compound regularly and grow.
What are Investment Vehicles and Why Do I Want to Drive One?
An investment vehicle is merely a product that investors use to grow their funds and maximize their earning potential. Most investors have several vehicles that they include in their portfolio.
A portfolio is a collection of your investments. By using an investment strategy, you choose which vehicles are right for you based on how much they will increase in value. Your goal is to make a profit by investing wisely.
While investing can be a risky proposition, unlike gambling with its uncertain outcome, investing is based on an informed decision.
Confounded…What is Compounding?
Compounding is a process of generating earnings on an investment and then reinvesting those earnings to generate more.
In other words, it’s like what happens if you put $100 in your savings account and leave it there. The longer it sits in the account, the more it grows. Each bit of interest you earn increases your base amount thereby increasing the base amount on which the interest is calculated.
Compounding magnifies the growth of your money.
What to Look for When Investing Your Money & How To Build Wealth?
Investors, especially first-timers, need to keep certain things in mind when they invest. Begin by considering your risk tolerance.
In general, your risk tolerance is your willingness (or in many cases, your ability) to assume a risk, a decline in your investments as you wait for them to increase or grow. Only you know how much you are willing to risk as an investor.
Next, you need to consider your investment objectives. Hopefully, you’re not looking to get rich quick, because while investing can net you an unexpected windfall, for the most part, it is a long-term game.
As an investor, you likely have short and long-term needs, desires, and goals that influence your decisions and govern your investment choices. For instance, someone closer to retirement age is likely to be more risk-averse than someone just beginning their career.
Depending on whom you ask, there are four basic factors to consider when determining your investment strategy:
- Capital appreciation
- Capital preservation
- Current income
Let’s look at each of these individually.
Invest for capital appreciation if you’re looking for a long-term investment, such as building wealth for a comfortable retirement. Don’t worry about the day-to-day fluctuations in the market, but be aware of any changes that might affect you long-term.
Investors closest to retirement are generally interested in capital preservation. They want to preserve their investments and not risk losing them needlessly.
No, this is not how much you currently earn, though that should be a consideration when you determine how much you can afford to invest. Instead, current income refers to whether your investment is aimed at generating a regular income. If so, you’ll be interested in something that pays a consistent and high dividend.
You’ve likely heard of speculators. They’re the people who are willing to risk it all. They trade frequently (think day traders) looking for a quick profit and aren’t concerned about the companies involved, just whether or not they can turn a fast buck.
What is the Right Investment for You?
Knowing where to invest your money will depend on your investment strategy and risk aversion. However, there are several suitable vehicles:
- Mutual Funds
- Real Estate
- Certificates of Deposit (CDs)
Speaking to an investment broker can help you decide what is right for you. Just be sure to diversify your portfolio sufficiently to help manage your risk.
While there are plenty of alternatives available, your best bet is to save regularly and invest for the long term.
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