Taking the mystery out of investing

Regardless of your age, the amount you have to invest, or the economic climate, investing is totally accessible, and something you can — and should — do. If it seems a bit intimidating, it might just be a matter of understanding it better (or having folks and resources at the ready who can take the mystery out of it). Let’s take a look at some investment basics, starting with the lingo.

What is investing, really?

Simply put, investing is spending money with the expectation of making a profit as a result. You buy an investment, or asset, with the hope that its value will increase over time and you’ll be able to sell it at a higher price. It’s different from adding money to a savings or checking account in that the potential for growth is greater, but not guaranteed — there’s always an element of risk involved (more about that in a moment).

Investing buzzwords

The financial world has its own vocabulary. Getting familiar with these terms (or reviewing them, if you’re not all that new to investing) is a great first step toward investing. Let’s drill down further into some common investing terms:

• Risk: A chance that the outcome of actual gains will differ from the expected outcome. This includes the possibility of losing some or all of an original investment.
• Risk tolerance: How much an investor can stand to lose or gain.
• Compound earnings: Interest or earnings calculated on the original amount and also on accumulated interest of previous investment periods. Compound earnings can be considered “interest upon interest.”
• Interest: A charge paid for the privilege of borrowing money.
• Variable rate: An interest rate that is different, varies, and can change.
• Fixed rate: A set amount or interest rate.
• Shares: Financial equities or securities that denote ownership in a public company.
• Stock: A slice of ownership of one or more companies.
• Mutual funds: A financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, and money market instruments.
• Bonds: A fixed-income instrument that represents a loan made by an investor to a borrower — almost like an IOU. Bonds include an end date when the principal of the loan is paid back with a variable or fixed interest rate.
• Index fund: Type of mutual fund with a portfolio designed to match or track the components of a financial market.
• Volatility: The amount of uncertainty or risk related to the changes in a stock’s value. Higher volatility means the price of the stock can change dramatically over a short period of time. Lower volatility means the stock’s value does not fluctuate much.
• Target date: The approximate date that an investor plans to start withdrawing money.
• Financial portfolio: A collection of investments an individual owns, usually including stocks, bonds, and cash.
• Exchange-traded funds: These investment funds, also known as ETFs, are exactly what the name implies: funds that trade on exchanges, generally tracking a specific index.

Generally speaking, there are three main things to consider when investing: your investment objective, risk tolerance, and time frame.

Investment objective

An investment objective is simply a set of goals that determines the best type of investment, or investments, in your financial portfolio. A financial advisor determines the optimal strategy for achieving their client’s goals while factoring in their risk tolerance and time horizon, or time frame. Examples of investment goals may be to fund home improvements, create an emergency fund, save for retirement, earn a steady stream of secondary (or primary) income, repay loans, pay tuition fees, or minimize tax liability.

Risk tolerance

Any kind of investment involves a certain degree of risk. Risk tolerance is the amount of market volatility and loss you’re willing to accept as an investor, and all investors are different. Fortunately, there’s something in the investment world for everyone, regardless of your risk comfort level, from certificates of deposit and IRAs to stocks and real estate. Determining your personal risk tolerance is going to be fundamental in helping to decide what types of investments to make.

Time frame

A time frame is your calendar outline, or time objective for achieving a financial goal, such as retirement. This information helps shape your investing timeline, or how long you plan to hold an asset before selling it. With investments, time really is on your side, as investment values are often affected by the market as well as the general economy. That means there are good and bad years. Your chances of making a big gain on your investment are much better if you’re able to take advantage of the good times — and weather the bad — over a longer expanse of time. That said, there are certain savings vehicles that work well for a close target date. Most importantly, it’s never too late to start investing!

Getting started

It’s a common misconception that getting started in investing takes a sizeable chunk of change. That’s just not so — remember, the chunk of change is the objective, not the starting point. Can you rework your budget to find even $10 a month? That might be one less glass of wine, case of soda, couple of lattes, wheel of fancy cheese, movie ticket… you get the picture. You might be thinking that 10 bucks a month won’t add up to much, so why bother, right?

Well, if you have those lattes every month for five years, what do you really have at the end of that time — aside from the jitters? Invest that same $10 every month, and at a 5% rate of return, at the end of five years, you would have approximately $680. Keep adding $10 a month, and in 10 years with the same rate of return, you’re up to approximately $1,550. In 15 years, that same monthly contribution could have grown to approximately $2,670 and in 20 years, $4,110. These calculations are, of course, approximate, and the rate of return is a projection, but this should give you an idea of what just a small amount of money can do. (We used the calculator at Saving.org — use it and get inspired!)

We mentioned something earlier about people and resources. We’ve got them, which means you’ve got them. So let’s get started! Visit our Online Investing page.