Don’t fall into thinking that investing is reserved for the already rich.
Although having more money to play with makes investment simpler and less risky, anyone with a healthy savings account and enough income to set aside a few dollars each month can afford to invest. So don’t ask yourself whether you should get involved — try to figure out the best ways to use your money.
Unfortunately, there’s not a simple answer to that question. We all have drastically different financial goals and mindsets; one person’s foolproof plan is someone else’s recipe for disaster. In the advice, I’ll outline the main factors to consider when starting your investment journey, along with the best approaches for different situations.
What to Consider First
Most people want to jump straight into figuring out the hottest new investment opportunity, thinking that they'll be guaranteed tidy profits if they select the latest up-and-coming cryptocurrency or stock.
But this is the wrong approach — before you even think about what you want to invest in, you should turn your mind toward how you want to invest.
Lost? I’ll break things down into five questions you should be asking yourself:
- What are your financial goals?
- What’s your investment timeframe?
- How much risk are you prepared to take on?
- Do you want to select your investments yourself?
- What type of account is right for you?
Let’s look at each one in turn.
We’d all like to have more money. But what exactly do you want it for, and how much are you going to need? Knowing the answers to these two questions is the foundation for building a solid financial strategy.
While investing your savings instead of leaving them sitting in a checking account will (almost) never be a bad idea, this method will be less effective if you don’t have a clear picture of what you’re heading toward.
Common financial goals include:
- College tuition (or the college tuition of your children)
- Paying off a mortgage
- Making a downpayment on a property
As you might have noticed, all the objectives above are longer-term goals that involve some serious saving over multiple years (if not multiple decades).
Although some people save for shorter-term milestones, like a wedding or vacation, investing is generally only recommended if you’re prepared to lock away your money for five years or more. I’ll be assuming most people reading this are in that category.
Next, you’ll need to figure out exactly how much you need to meet your goal(s).
For example, if you’re saving for retirement, start by calculating how much annual income you’d need to live off. Many people in the financial independence movement recommend following the 4% rule (multiplying your yearly income by 25).
Like mortgages and college tuition, other goals are easier to associate with a number for — but don’t forget to account for inflation. If college tuition costs $20,000 a year now, expect it to be a little more expensive in ten years.
Once you know your financial goals, it should be pretty straightforward to figure out the kind of timeframe you need to be investing over.
If you’re saving for your kids to go to college and the eldest is currently four years old, you’re looking at a time frame of 14 years. Or, if you’re 30 years old and saving for retirement, expect a horizon of roughly 35 years (assuming you want to retire at the “normal” age).
You get the gist.
The timeframe you decide on is one of the most significant determinants of how much risk you should take. For example, investing $100 in Bitcoin or Tesla shares is pretty risky if you know you’ll need to use that money in two weeks — maybe the market will just so happen to be experiencing a dip, meaning you’ll lose money.
Take a look at the price chart of any stock, crypto, or currency pair, and you’ll know how volatile prices can be in the short term.
But if you know that you’re in it for the long haul and won’t need the money for a few decades, you can be reasonably confident that your investments will rise in value by the time you withdraw them.
Naturally, there’s always a chance that a company could go under or lose value — that’s where diversification, research, and some thought about your risk tolerance come in.
If you invest all your money in a single company or asset, there’s far more risk involved than if you spread it across multiple companies or assets.
Then there are the investments that are inherently riskier than others. For example, pouring your money into a brand-new company or a new asset class like cryptocurrencies involves far more risk than putting your trust in a “safe pair of hands,” such as the Googles and Amazons of the world.
Anything with inherent value, like real estate in a desirable area, is also a decent option.
Still, risky investments aren’t necessarily a no-go — you need to make sure you’re going into them knowing and accepting their riskiness.
You might be thinking, haven’t I already covered investment selection in the paragraph above? Not quite — investment selection here is all about deciding whether you want to handpick your investments or pass that responsibility onto someone else.
If you’re new to investing, you might find enlisting a professional to help you select your investments more appealing than having to do everything yourself. However, while this can be a good option, it comes with a fee — portfolio managers charge a management fee, which eats into your returns, especially if you’re only investing a modest amount.
But if you’ve never invested before, you probably don’t even know what you don’t know — how can you hope to pick the right platform, never mind the right assets and products?
Fortunately, there’s a third option: using a robo-advisor. Many platforms and apps have launched special software and applications that guide investors through selecting and managing their portfolios. The sophisticated algorithms bring suggestions that rival actual asset managers.
Some will take users through a quiz with questions about their risk tolerance, financial goals, and similar; others provide tools for automatic investing and rounding up spare change to make investing effortless.
Figuring out what you want to invest in is just the first step — you also need to know exactly how you’re going to do it. Or, in other words, which account type you’ll open and on which platform.
In the US, common investment accounts include:
- 401(k): A tax-efficient retirement plan allowing employees to save part of their paycheck, often involving matched contributions from employers.
- Traditional IRA: An account that lets you contribute after-tax money and withdraw it tax-free (along with the extra earnings) at retirement age.
- Roth IRA: An account lets you contribute pre-tax money and pay tax when you withdraw it at retirement age.
Tax-effective investment accounts and pension plans exist in many other countries, but they’re likely to have different names and involve slightly different rules. For instance, the UK offers individual savings accounts (ISAs), which allow individuals to save up to a set threshold each year and later withdraw the funds they’ve accumulated tax-free.
You might also want to consider accounts for specific savings goals, such as an account for saving for college (known as a 529 account in the US) — these can offer special perks.
Now you’ve given plenty of thought to the questions outlined above. It’s time to get on to the juicy part of the article — selecting suitable investments.
There’s not a single correct answer here since the right investments for you will depend on your answers to the questions outlined above — that’s why I’ve highlighted who each of the investment types below is most suitable for. Let’s go!
Best for: Longer timeframes and higher risks for higher returns.
When you buy a stock, you essentially become a shareholder (or owner) of that business — so whenever the company increases in value, your investment will also rise in price.
You only have to look at how much some of the most successful stocks have grown over the last few decades to see how profitable this can be. For instance, if you’d invested in a Google stock back in July 2016, its value would have jumped from $719.85 to $2585.72 — an increase of around 259.2%.
That’s a whole lot better than stowing it away in your savings account and even better than investing in the S&P 500 (which achieved a return of around 100% over the same period).
Yet, although stocks can be a path to mouthwatering returns, they can also end in tears. If you purchase shares in a company that happens to go under, you’ll lose your entire investment. And even if a firm doesn’t go out of business entirely, it could lose a lot of its value, even over the long term — industry trends, technology, and customer opinion can suddenly render a profitable business less than desirable.
This isn’t likely with a business as dominant as Google, but there’s no way of knowing for sure what’s going to happen tomorrow.
Luckily, there’s a solution.
Best for: Longer timeframes and lower risk.
If you like the sound of the returns and liquidity that stocks can bring but not the high risk and the need to handpick your investments, I’ve got great news: you can opt for a fund instead. Funds let you invest in a mix of different company stocks, therefore offering increased diversification.
They don’t tend to achieve the same level of returns as the highest-performing stocks — but they’re far less risky.
While it’s reasonably likely that a single company could face tough times, it’s far less likely that thousands of companies will experience these same difficulties (other than during recessions, but these are a natural part of the economic cycle and nothing to be scared of).
There will be some high-performers and some low-performers (or non-performers) in any fund, but you’ll still get good investment returns on average. As long as you’re willing to invest for long enough, that is.
The main types of funds available to investors are:
- Mutual funds: Contain a selection of bonds, stocks, and other assets (e.g., real estate or commodities) picked by asset managers and pooled with other investors’ money. Traded at the end of the day.
- Index funds: Contain an index, like the S&P 500 or the FTSE 100, and are traded throughout the day (just like stocks).
- ETFs: Contain an index but are traded at the end of the day, just like mutual funds.
The differences between these are subtle but worth noting.
Best for Shorter timeframes and lower risk.
Although I said I’ll focus on investment strategies for longer timeframes and goals, an article about the best investments wouldn’t be complete without giving an honorable mention to a top short-term investment option: bonds.
Bonds are essentially loans, with the borrowers usually being the government or large companies. Because of who you’re lending to, the risk associated with bonds is low, yet this also means that the returns are lower than other types of assets.
The exact returns you can expect depend on the type of bonds you opt for and who the borrowers are — some bonds are unable even to beat inflation, while others can earn up to 5%.
Bonds are often used in funds to hedge against risk since they’re less affected by the stock market swings.
However, if you want to invest over a larger time period, it’s generally agreed that the benefits of investing in bonds are minimal. If you know you’re not going to access your funds within the next few years, the cons of low returns will outweigh the benefits of increased security.
Best for: Portfolio diversification and stable returns.
I want to address something right away. Although I just said that real estate offers stable returns, this isn’t true all of the time. Properties have inherent value — people will always need somewhere to live — so their prices will generally increase over time.
But real estate doesn’t always match the returns seen in assets like stocks, and if you choose the wrong property location, you could fail to achieve much of a return at all. However, as a big advocate myself, I wanted to explain why it can be such a great option.
For one, the gains can beat the stock market if you choose the right area. Just look at how much property prices in London have increased over the last few decades!
If you purchase a property and then rent it out to others, it can also be a great way to generate income and make your money work for you — you can use your investment to finance even more investments by using rent payments toward the future down payment.
Still, money invested in real estate is less liquid than anything in the stock market. It carries some serious risk — you might have issues with tenants or face expensive maintenance operations.
Best for High risk and high returns.
Last but least, we have cryptocurrencies. This certainly isn’t an option for the faint-hearted — it’s no secret that the crypto market is somewhat wild, and you need a clear strategy for the price swings. Just look at how much the value of Bitcoin has fluctuated in the last year alone.
But if you’re prepared to take on some risk to earn higher returns — often even higher than anything you could achieve from investing in stocks — then the world of crypto is the way to go. For example, if you’d bought into Bitcoin five years ago, you’d have achieved a return of 5144.33% by now — and the coin is currently way below its all-time high.
Just be prepared to do some serious research before you start investing in this one. Following the crowd could lead you to buy into a bubble at the wrong time, whereas buying niche coins at random could involve you in a scam (the crypto world is unregulated for the most part).
It’s Decision Time
You should realize by now that choosing the best investment vehicle(s) for you is a personal decision. For example, some people are happy to accept significant risk by investing in specific stocks or cryptocurrencies. In contrast, others would prefer to sleep at night knowing their money is (relatively) safely locked away in index funds or property.
I’d recommend doing a mixture of all the above. It’s good personal finance practice to have a good amount of liquid cash at hand, and it’s safest to invest the rest of your funds across a range of assets or investment types. Why not invest the bulk of it in something safer like an index fund but allocate a smaller percentage to something riskier with higher potential returns, like crypto or individual stocks?
Whether that idea fills you with boredom, fear, or excitement will say a lot about your risk preferences and what your next step should be.
Tim Thomas was born in Guildford and now lives near Southampton, the UK with his family. Tim started his career in the financial markets and has traded and invested in stocks, options, forex, futures, crypto, and real estate for over 20 years. His website, https://timthomas.co/, is dedicated to teaching swing trading strategies for profits, helping traders reach their wealth and financial freedom goals.