Investing

Investing is simply putting money into something — often an asset like a stock, a bond, or real estate — because you expect to earn money from it. You can start small. In fact, starting small can be a useful approach. Here are some of the goals you can achieve through investing:

Building the value of your investment portfolio — the collection of investments you own — depends on making informed choices about the investments you make and how you manage them over time.

There's no question that saving is a crucial first step to building wealth. But to make sure your money is working for you, and to be able to afford many of your financial goals, you'll need to supplement saving with investing. That's because of inflation. Inflation means that the cost of products and services rises over time.

When the cost of things goes up, the money you have buys less. If the inflation rate is higher than the interest rate you're earning on your savings account, your savings are actually losing, instead of gaining, value. Unlike savings, the income you earn from investments has the potential to grow faster than inflation and close the gap between what things will cost and the money you have to pay for them.

The Rule of 72 shows how inflation can erode your income. You divide 72 by the annualized inflation rate, which has averaged 3% since 1926. Since 72 ÷ 3 = 24, you can expect your living expenses to double every 24 years. That's eye-opening, since there's nothing unusual about a retirement lasting 24 years — which is exactly why it's critical to have more income as time goes by.

Getting started in investing is simpler than you may think.

Every investment belongs to an asset class — a group of investments that work essentially the same way. Each has the potential for a different level of long-term return, so each can play a useful role in your portfolio.

As you start, one approach is to focus on a few of these — stocks and bonds, the funds and ETFs that invest in them, and cash equivalents — because they're easy to buy and sell, available at a wide range of prices, and offer growth, income, or both.

Investing is a balance between risk and return. Investment return measures the change in an asset's value plus any income it provided over a period. As a rule, the riskier the investment, the higher the potential for return — and the greater the chance of loss. All investing involves risk; you may not earn as much as you expected, and it's possible to lose some, or in an extreme case all, of the money you invested.

Asset allocation is a core strategy that involves spreading your investments across the major asset classes — equities, fixed income, and cash equivalents. Because these classes tend to perform on different cycles, holding several puts you in position to benefit from whichever is doing better, helping offset declines in the others.

Beyond holding more than one asset class, you also need to diversify within them — owning a variety of stocks and bonds. If all your stocks are in one industry, a downturn there hits all your holdings the same way. For most people, one of the easiest ways to diversify is to invest in mutual funds and ETFs that are already diversified. Investing in an S&P 500 index fund, for example, means you're indirectly invested in 500 large-company US stocks.

Recognizing the red flags of investment fraud is a crucial part of investing. Any one of these telltale signs should warn you there's something wrong.