INVESTING VS GAMBLING

Too often, people confuse investing for gambling. It’s not. If you take a look at the dictionary definitions, investing and gambling are quite different:

invest: “to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.” (via Dictionary.com)

gambling: “the activity or practice of playing at a game of chance for money or other stakes.” (via Dictionary.com)

So with investing, you’re making an educated decision to earn potential profits. With gambling, you’re playing a game of chance.

Look… all investing involves risk. But there’s a big difference between smart investing and gambling:

Buying a “hot stock” on a tip, without doing significant research, is gambling. Diligently setting aside money, putting it the best stocks or funds for your goals, and leaving it put for the long run… that’s investing.

If you love researching stocks and making fast trades in search of short-term profits, fine. It’s fun. I just don’t recommend doing it with more than 10 percent of your money.

That type of investing is for right now; I want to show you how to invest for the future.

How to invest for the first time (my advice)

1. Choose your platform

First, you’ll need to choose a platform with which to invest. Available platforms include:

• Online stock brokers – these are brokers that are available online. You can typically do everything without ever having to speak to a person, which is nice for some people. Online brokers are also often much cheaper than a traditional brick and mortar broker where you’d meet face-to-face with a person.
• A financial advisor – some people may choose to invest with a financial advisor because they want face-to-face interaction, professional advice, and don’t mind paying a premium for someone handling their money. Oftentimes, people with large sums of money to invest with hand it over to a financial advisor so they don’t have to do the work.
• Robo-advisors – online brokers like Betterment and Wealthfront offer the benefits of a financial advisor with the ease of using an online broker. Robo-advisors are growing in popularity and take the stress out of knowing how (and when) to invest, as well as having to meet with someone in-person. With robo-advisors, you’re instantly diversified in a plethora of stocks and bonds, and your allocations will automatically adjust for you based on your goals.
• Investment apps – you may want complete ease and automation, as well as the ability to to a) not have to talk to anyone in person, and b) not have to sit down at a compute to do any research. Using an investment app like Stash, you can invest as little as $5 right from your phone (and get $5 just for signing up!).
• Direct mutual fund accounts – in order to avoid paying broker fees, you can actually buy mutual funds directly from the most mutual fund companies. Owning mutual funds is a smart investment decision in its own right, but avoiding additional fees is a wise money move as well.
• Dividend reinvestment programs (DRIPs) – a DRIP is a great way for you as an investor to avoid paying brokerage fees by purchasing a company’s stock directly from them. It’s not common with all companies, but many larger companies will offer it. Many companies will even offer incentives or discounts if you set up recurring investments or buy larger blocks of stock from them.

Here’s my straightforward advice for you…

• Until you become a comfortable investor – we recommend buying mutual funds or ETFs, either through an online broker or direct mutual fund account. To make a more educated decision, make sure you check out the research we’ve done for you on the best (and most recommended) brokers.
• If you’re not interested in choosing individual investments – Betterment offers a very simple way to gain exposure to the total stock and bond market. (You just deposit money like a savings account, choose your risk tolerance on a scale of 1-10, and it invests in the overall market for you.)
• If you want investing to be as easy as possible – look into Stash, an app that lets you invest right from your phone with as little as $5.

2. Choose your account type

Next, you’ll need to choose whether you’re investing in an individual retirement account (IRA) or a general taxable account.

An IRA provides certain tax advantages as an incentive to save for retirement. The downside is there are limits on how much you can contribute to the account each year and when you can withdraw the money.

There are actually three types of IRAs you should be familiar with:

1. Traditional IRA – with this type of account, your contributions may qualify for a deduction on your tax return. In addition, there’s the potential that your earnings can grow tax-deferred until the time you need to withdraw them at retirement age. The primary argument with a Traditional IRA (vs. a Roth IRA) is that most feel they’ll be in a lower tax bracket when they retire, so paying taxes on this money at stage will be cheaper than paying them when they’re earned (considering the up-front deduction).
2. Roth IRA  – with a Roth IRA, your contributions are after-tax and the money can potentially grow tax-free while you save. The big benefit here is that withdrawals at retirement time are tax-free, assuming you meet the required conditions. This is my number-one recommended retirement account for most people.
3. Rollover IRA – this is an account that’s created by rolling over another account, such as a company-sponsored 401(k). For example, if you have a 401(k) with an employer who you leave, you can roll that money over into a Rollover IRA.

Bottom-line advice: If you’re new to investing and can afford to begin putting money away for retirement, I recommend everybody begin investing with a Roth IRA.

If you already have a retirement account or need to invest money for another goal (like buying a home or starting a business), a regular brokerage account will do. Keep in mind that your capital gains—the money you earn when you sell a security for more than you paid for it—is taxable, as will certain dividends you receive.

3. Choose your investments

Finally, you’ll need to select your investments. This is where it gets overwhelming.

My advice is to stick with mutual funds or exchange-trade funds rather than individual stocks and bonds until you get your feet wet. These types of funds enable you to invest in a broad portfolio of stocks and bonds in one transaction rather than trading them all yourself.

They’re not only safer investments (because they’re diversified), but it’s often far less expensive to invest this way. You’ll either pay just one trading commission or nothing at all (in the event you buy a mutual fund directly from the fund company), as opposed to paying trading commissions to buy a dozen or more different stocks.

Here are some posts to get you started choosing investments:

• How mutual funds can help you start investing
• 5 index funds to get you started
• Index funds vs target date funds: How to decide which is right for you

If you decide you want to venture out and buy individual stocks, we recommend you take a slow and steady approach. Don’t put more than 10 percent of your portfolio in individual stocks until you get very comfortable with what you’re doing.

A great place to start is by reading about value investing, where we focus on heavy amounts of research and a “buy-and-hold” mentality.

Some final advice

The most important factor in being a successful investor is not the stocks and funds you pick. Successful investing depends on:

1. Choosing proper asset allocation – the overall mix of bonds, stocks, and cash you hold in your portfolio.
2. Making and sticking with an automatic investment plan – this way you avoid making terrible, emotionally-charged decisions—like selling at the bottom of a market crash.

The investing information on Money Under 30 barely scratches the surface of all the knowledge out there about investing, but that’s OK. We’re not trying to train the next class of hedge fund generations so much as give the average person enough knowledge and confidence to begin investing on your own. I hope the investment strategies here are helpful.

  

Courtesy GCCH

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