Investing 101

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There is an old saying when it comes to investing: If your money doesn’t work for you, then you will continue working for your money.

That means that until you free up enough personal capital to invest in income-yielding vehicles—stocks and bonds come to mind—you will continue to labor to earn your livelihood. For most of us, even smart investing will never quite replace the 9-to-5 regimen, at least not until retirement. But even the most minimal investments can augment that income and provide a greater financial cushion to contribute to a more comfortable life and a more secure future.

It's a simple concept behind an enormously complex equation that drives the money stream around the world. Many people get rich on their investments, but you have to play in order for it to pay.

Start with developing a good savings habit at your local bank or credit union. Depositing money in financial institutions is a safe and secure way to save your money and keep it liquid. But the low interest rates FIs offer make it a bad choice if you want that money to grow. In fact, if your banked money is earning you 2% interest and inflation grows by 3%, you’ve just lost a dollar on every $100 you have in the bank. That’s a bit simplistic, but you get the idea.

The stock market is the avenue most investors take, buying shares in for-profit companies that then use your money to help them grow, returning the favor by paying dividends on your investment. Everybody wins.

There are things you need to know before you start investing:

• Start early, even if you have to start small. Thanks to the miracle of compound interest, the money you invest will earn interest and, as time goes by, that interest also earns interest. Think of your investment as a money snowball that just keeps growing in size, once again, earning more money for you.
• Investing in the stock market is a long-term game. The longer your funds stay invested, the better off you will be. The market fluctuates for many reasons, and not all of them financial. Your investment likely will go up and down in value, but history has shown that the overall market index has risen over time and so will your investments.
• Invest through a firm that knows what it’s doing. You can go it alone, of course, but that will require a lot of personal work learning the companies and playing the market. Most investors start with mutual funds, which will spread their investment risk over multiple companies with the idea of keeping things stable and balanced. Find a broker you can trust. 
• If that firm is a fiduciary firm, so much the better. Fiduciaries are committed to serving the needs of their investors. There are no market guarantees, but fiduciaries have a different philosophy, which can make them more responsible to those investing in them.
• Know your investment goals and mind your timing. Younger investors can take on riskier investments that earn greater returns because they have more time to recoup any losses. Older investors trying to build capital for retirement are better off sticking to safer investments. The returns may be lower, but the performance is less volatile.

At the end of the day, it comes down to knowing what you will need financially, both short term and long, and acting accordingly. It’s not easy and requires a stomach for risk, but the returns will eventually create a profit, and suddenly you will find that your money is working for you.

In past columns we’ve advocated that, in managing your money, you should always pay yourself first. This is a good way to start.