If you’re wondering how to invest with confidence, start by knowing what you want your investments to do for you, how much risk you’re willing to take, and then understand the options to accomplish those goals.
The information below applies to whether you already invest, invest your own money, or work with a financial advisor. This is because only you know what you want from your money and in your life, and only you will face the delight or disappointment if you don’t achieve it.
Clarify the Reason You Are Investing
The first place to start investing with confidence is to know why you’re investing. It’s easy to get lost in the apparent complexity or emotions of investing and forget that investing is simply using your money to get the specific result you want.
When buying a down coat, the specific result you want is to stay warm in January when it’s snowing. You go out shopping for the coat with this end result in mind.
Do the same with investing your money.
There are three main results you get from investing. These are the reasons you invest, not because you think you should, your parents told you to years ago, or you read it online.
Clarifying your reasons for investing first will confidently lead you to the right investments.
Wealth Building or Growth Investing
The first major reason to invest is to build wealth. In investing lingo, this is called Growth or Capital Gains investing which will make perfect sense after you read this next bit, so keep reading.
With Growth investing, you are investing with the expectation that your investment will increase in value while you own it. Two excellent things can happen as a result of this increase in value.
- Your net worth will increase because the value of your investment account has increased.
- If you choose, you can sell the investment at a profit. When you do, you have created a capital gain, which has put more money into your investment account and thereby also increased your net worth.
Wealth Building Tip – Note that the sale must occur to lock in that capital gain. Otherwise, you have a temporary or conditional increase in your net worth which happens as a result of constant movements in the value of most investments in stocks and bonds.
Why Invest for Growth?
Most people invest to build wealth when they already have plenty of income to live how they want. This income is usually from job income.
Growth investing is usually associated with people under 50 who have a long time to save and invest money before retirement.
How to Invest for Growth
The most common investment used for growth investing is stocks. There are, however, many alternative investments that can result in wealth building, too. Increasingly popular examples are real estate and small business.
Advanced Wealth Building Tip – Any investment, or asset, that is bought and then sold for more than you paid for it can build wealth. This means a focus on buying inexpensive assets can enhance wealth building.
The other major reason people invest is so their investments pay out income to them. Investment income most commonly comes from stocks and bonds.
Income investing is usually associated with retirees since they need investment income to live.
In the past decade, income investing has become popular with younger generations choosing to live off investments earlier than previous generations. This movement has been the result of more investing options and better information and access to these income investments.
Advanced Wealth Tip – Many other types of investments pay income, too, such as real estate rentals and small business. These are often called alternative investments.
Investments That Grow and Pay Income
The is the third major reason to invest is to go for both income and growth.
With this investing method, investors buy undervalued, income paying investments that are more likely to increase in value while they own them.
Who wouldn’t want to build wealth AND get income from investments? Not to give you TMI, but just to mention that not everyone wants more income, believe it or not. This is because income sometimes triggers higher taxes, so more income can be too much of a good thing for high income earners.
In this case, an investor may decide to go for investments that will increase in value only.
Define Where You Are Now
See how much clarity you have from knowing the 3 main reasons to invest? After reading this you’re probably saying to yourself:
I work 50 hours a week, make $150,000 which more than covers my bills so I definitely want to build wealth over the next 25 years and in a way that requires no time.
I am retiring in two years and I won’t have enough money from social security to live anywhere near how I want so I need to start focusing on income investments.
I became a SAHM and I want to spend some time proactively investing to increase our household income and develop my investing skills.
What are you saying? There is gold in that answer inside your head. It will lead you to how to invest with confidence because it is based on what you are going to accomplish from investing.
The next step is to know the different ways you can get those results you want.
Know Your Investment Options
When you know what your options are, you can choose from among them. This fuels confidence with anything in life.
Most people assume that stocks are the only way to invest. People who have hired me for wealth coaching really just wanted to know how to invest in stocks assuming that would help them reach their financial goals. But it may not, and there are many variables and options.
Stocks can, nevertheless, be an excellent investment choice, especially for those who have plenty of time to build wealth or desire dividend income.
Again, over the past decade the investment options that were once reserved only for the wealthy have opened up to investors. Here are just some of the more common investments available to investors now:
- Real Estate Investment Trusts
- Real Estate Ownership
- Peer to Peer Lending
- Small Business Investing
- Buying or Creating an Online Business
Don’t be overwhelmed by the choices here. I like to present options besides just stocks and bonds to expand the awareness of all the choices for Financial Woman readers.
Plus, investing beyond stocks and bonds is often needed to build higher levels of wealth. (Let’s face it; the Forbes 400 didn’t get there from passive long term investing in stocks and bonds.)
Having noted that, a core portfolio of stocks and bonds is a great place to start for most investors. And since most investors have at least a portion of their investments in the stock market, and that is probably what brought you here, the rest of this post will be more focused on stocks.
Understand Your Investments
Just like with anything in life, knowledge reduces risk.
A lot of investors think investments are too confusing to understand so they:
- Do what everyone else is doing
- Invest at market tops in yesterday’s winners
- Hire a financial advisor without understanding how to monitor the results they are getting
It’s imperative to understand where you’re putting your hard earned money. It’s unlikely you’d go on a trip without some research and knowledge first, yet people invest everyday with less time and effort than they put into planning a vacation.
So, understand anything you invest in. The next step to invest with confidence is to decide how much risk you want to take.
How to Lower Investment Risk
It’s one thing to get the results you want from your money. It’s another thing to feel confident and happy on the way to achieving your financial goals. And you can’t be confident and happy if you’re worried about losing more of your hard earned savings (investments) than is acceptable for your peace of mind.
Let’s face the reality of investing. Almost all investments worth making will increase and decrease in value based on long term cycles.
You’ve probably seen this with real estate. And you’ve at least heard of big stock market drops (called bear markets) if you haven’t personally experienced the pain of them.
And a drop in real estate, including the value of your home, often drops during or near stock bear markets. This means your net worth can take a hit for two of your major assets, stock investments and your home.
Here’s what’s cool about investing that most stock market investors don’t realize:
You get to choose how much investment risk you want at any given time. And this choice removes being a victim of your investments. And when you are in control of your investment risk, you can invest with confidence.
How do you do this?
How to Choose Investment Risk
Own that you are responsible for how much investment risk you have.
Estimate about how much risk your investments have any given time by using facts, historical data and math. (This replaces emotional investing in a heartbeat!)
Lower your investment risk if you’re not happy with the amount of risk you have. This is most easily accomplished in one or both of three ways:
- Increasing the amount of money you have in cash (money market)
- Making investments with lower risk
- Increasing investments that usually go up when stocks go down
The first two ways are pretty straightforward, right? Let’s look at the third option more.
Investments That Go Up When Stocks Go Down
Owning investments that usually go up when stocks go down lowers risk for stock market investors. One of the most common investments that move in the opposite direction of stocks is U.S. Treasury bonds.
This explains why the most popular passive (little effort) investment method is investing a percentage in stocks and a percentage in bonds. The amount that goes into each of these categories is based on how much risk you want, along with other factors like your age and dependents.
This simple and popular investment method is called asset allocation. It’s done by both financial advisors and investors who manage their own money. Read my article Why Use Asset Allocation here to learn more about this.
Advanced Wealth Building Tip – There are more advanced risk lowering strategies more advanced wealth managers and investors use. For example, considering the current cycle of an investment and the overall economy, investors can often enhance the results from standard asset allocation investing.
Invest with Confidence Summary
If you understand and embrace the information in this article, you’ll understand how to invest with confidence more than the large majority of investors.
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Disclaimer: Nothing in this post is meant to be taken as personal financial advice. It is for education only. Do your own research and hire a financial advisor if you think you need one.