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How to Invest Money - Find the Best Way for You - YouTube
Channel: The Motley Fool
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hey there I'm Dylan Lewis and in this
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FAQ we're talking about how you can
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invest your money regardless of which
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way you go about putting your money to
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work you're gonna need a few things a
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brokerage account the right mindset and
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money you won't need in the next three
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to five years investing is a great way
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to build wealth but it's important to
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make sure you're starting on solid
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footing generally it's best to only
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invest
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after you've set aside some savings in
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an emergency fund and paid down any high
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interest debt having three to six months
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of living expenses on hand is helpful in
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case anything unexpected happens and
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paying down high interest debt is a
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guaranteed return that's hard to beat by
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anything that you'd invested taking care
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of those things first also allows you to
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take the long-term approach to investing
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there are years where the economy is
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doing well and the stock market is up in
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years where it's down if you're only
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investing money you don't need in the
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short term you can weather that
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volatility and know that long term
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growth is on your side also if you're
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investing money you might need soon it
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could put you in a position where you
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have to sell investments at a loss
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because you need to make a mortgage
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payment or pay a medical bill and nobody
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wants that that's all to say that
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temperament is key it is the most
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important thing when it comes to
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investing if you're going into things
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with the right mindset you can go ahead
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and open a brokerage account now
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choosing where to open a brokerage
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account will largely depend on what
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you're interested in investing in though
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it's hard to go wrong with the major
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discount brokers and major institutions
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like Vanguard if you want to run down of
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the major brokers check the description
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for a link of our broker Center opening
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a brokerage account is typically a quick
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and painless process that you can do in
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a matter of minutes you can easily fund
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your brokerage account via an EFT
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transfer by mailing a check or wiring
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money there are a couple things to keep
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in mind them first determine what kind
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of brokerage account you need for most
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people that are starting out this means
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choosing between a standard brokerage
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account or an individual retirement
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account the main consideration here is
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why you're investing and how easily you
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want to be able to access your money if
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you want easy access or are just
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investing for a rainy day
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you'll probably want a standard
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brokerage account on the other hand if
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your goal is to build up a retirement
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nest egg and IRA is a great way to go
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these accounts come in two varieties
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traditional or Roth traditional IRAs are
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funded with pre-tax money which lowers
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your taxable income in the year you
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contribute but the money you take
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retirement will be taxed Roth IRAs are
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funded with after-tax dollars so there's
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no immediate tax benefit but you can
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withdraw the money tax-free in
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retirement if you're thinking in years
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go with the standard brokerage account
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if you're thinking in decades it might
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make sense to start an individual
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retirement account the great thing is
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you don't have to choose you can do both
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as long as you continue to save money
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and both account types will allow you to
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buy stocks mutual funds bonds and ETFs
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so that's what you need to start
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investing now on to what you can invest
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in when most people think investing they
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think stocks and bonds it's what they
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hear all the time in the news so we're
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gonna quick define both of them a stock
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is an equity stake in a business owning
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a share of a company means you're a part
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owner and you're entitled to a sliver of
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the company's profits if the business
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succeeds you enjoy your stake in the
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business being worth more a bond is
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really depth if you buy a bond you're
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loaning a sum of money to the issuer for
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a predetermined period of time in
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exchange the issuer promises to make
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regular interest payments at a
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predetermined rate until the bond comes
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due and then repay what you lent them
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upon maturity there are other ways to
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invest but stocks and bonds are
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generally the most common now you can
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put your money to work in stocks and
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bonds in several different ways you can
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buy individual stocks and bonds mutual
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funds that hold stocks and bonds and
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ETFs that holds Docs and bonds we're
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going to explore all three options and
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talk about the pros and cons of each one
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of the most popular investing vehicles
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out there is the mutual fund mutual
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funds are a collection of stocks bonds
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or other securities that investors can
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buy a share of and they're wildly
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popular because rather than having to
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choose individual stocks or bonds a
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single mutual fund can instantly give
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you a well diversified set of
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investments you can find mutual funds
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that invest in stocks bonds as well as
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other types of investments such as
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commodities within each category there
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are a variety of sub types such as
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growth stocks value stocks international
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stocks and a variety of risk levels if
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there's something you're interested in
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investing in there's probably a mutual
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fund for you most funds are available to
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all investors even those who only have
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modest amounts to invest which increases
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investing access for many beyond that
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basic definition if nothing else the
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thing you need to know about mutual
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funds is that they're actively managed
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mutual funds and index funds we
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generally prefer the latter
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actively managed funds have a manager
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who's trying to follow a specific
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strategy to try and provide superior
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returns unfortunately many of them don't
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succeed most research shows that due to
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short-term mindsets active trading and
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high fees actively managed funds tend to
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put up worse returns than the major
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stock market indices like the S&P 500
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that's why many investors like us prefer
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to put our money into index funds an
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index fund managers job is to simply
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match the index the fund tracks which
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takes significantly less time and effort
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than the analysis and portfolio
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management involved with actively
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managed funds because of that index
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funds typically have significantly lower
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costs and are virtually guaranteed to
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match the long-term performance of their
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underlying index if you're interested in
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mutual funds be sure to keep an eye on
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the returns over the one three and five
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year period and how they compare to the
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S&P 500 or the funds relevant benchmark
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you should also look at the funds
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expense ratio basically how much you
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have to pay the person managing the fund
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if it's high the fund better be putting
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up better returns than the S&P 500 or
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its relevance benchmark net of fees
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mutual funds are great for beginners
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they allow you to instantly be
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diversified and you'll earn returns that
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beat most professional investors for
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example the sp500 mutual funds like the
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Vanguard V FedEx have allowed folks like
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you and me to instantly own a piece of
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the 500 largest publicly traded
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companies in the US enjoy annualized
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returns of 10 percent per year and pay
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very little to get started another very
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popular investing option for folks is
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the ETF or exchange-traded fund ETFs and
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mutual funds are basically siblings
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mutual funds are offered directly
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through mutual fund companies and many
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brokers also offer access to certain
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index mutual funds in their brokerage
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accounts ETFs trade directly on stock
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exchanges allowing anyone with a
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brokerage account to buy or sell shares
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at any point when the stock market is
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open for trade like mutual funds there
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are thousands of ETFs out there so it's
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important to understand what you're
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looking at when you're looking to buy
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the important metrics are also very
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similar to mutual funds if you want to
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look at your performance and your fees
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each ETF publishes an annual expense
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ratio which represents the percentage of
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the total fund assets that goes towards
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covering the cost that the ETF incurs
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every year smaller expense ratios mean
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more money staying in your pocket
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and the biggest and most efficient ETF
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providers have expense ratios for their
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funds that can be less than 0.1% some -
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ETFs are worth paying for but only
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because their returns beat their
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benchmark even when you factor in those
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fees if you're new to investing ETFs are
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a great place to start because they're
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widely available across brokerages and
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unlike some mutual funds there generally
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aren't account minimums associated with
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buying them ETFs and mutual funds allow
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the average investor to easily and
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cheaply be invested and diversified
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buying baskets of stocks and bonds at
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once rather than picking and choosing
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them one by one and because of that they
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are one of the best tools for new
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investors but they are not the only
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options most of us are used to borrowing
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money in some capacity whether it's
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mortgage on our homes or bumming a few
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bucks off a friend when we realize we've
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left our cash at home just as borrowing
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is a part of life for everyday people
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it's a practice companies and
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municipalities uphold as well even the
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federal government does it how by
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issuing bonds bonds come in several
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varieties corporate municipal and
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government though their nuances might
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differ they're all generally the same
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debt instruments used to raise money
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when an organization issues a bond it
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asks for a certain investment of money
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it then promises to pay back that
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investment plus interest over a
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specified period of time for example you
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might buy a 10 year $10,000 bond paying
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3 percent Interest the issuer in
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exchange will promise to pay you
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interest on that $10,000 every six
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months and then return your $10,000
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after 10 years there are two ways to
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make money by investing the bonds the
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first is to hold the bonds until their
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maturity date and collect interest
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payments on them bond interest is
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usually paid twice a year the second way
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to profit from bonds is to sell them at
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a price that's higher than what you pay
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initially for example if you buy $10,000
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worth of bonds at face value meaning you
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paid $10,000 then sell them at $11,000
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when their market value increases you
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can pocket the $1,000 difference
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stocks and ETFs are traded on public
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exchanges so they're fairly easy to buy
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and sell now bonds on the other hand
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aren't traded publicly but rather trade
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over-the-counter which means that
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investors must buy them from brokers the
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problem with the system is that because
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bond transactions don't occur in a
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centralized location investors can have
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a harder time knowing whether they're
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getting
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our price the Financial Industry
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Regulatory Authority or FINRA regulates
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the bond market to some extent by
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posting transaction prices as that data
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becomes available but investors can
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sometimes experience a lag in getting
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that information this isn't a reason not
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to buy bonds but it's something to be
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aware of when it comes to bonds the
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things you want to focus on are the bond
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rating now this is a score of sorts that
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measures the financial strength of the
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entity issuing the bond there are three
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major bond rating agencies Standard &
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Poor's Moody's and Fitch and these
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agencies use a combination of letters
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numbers and symbols to indicate the
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creditworthiness of bond issuers ratings
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tend to follow the general grading
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system days are great and everything
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else that follows is professedly worse
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generally speaking the higher a bonds
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rating the safer it is as an investment
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but higher rated bonds also tend to
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offer lower interest rates than bonds
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with lower ratings and that's because
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investors are rewarded for taking on
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additional risk although bonds are
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generally considered a lower risk
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investment than stocks they are by no
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means risk-free all it takes is for a
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bond issuer to default and you as an
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investor will be out some money
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bonds generally offers stability and
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prick table income but they come with
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some disadvantages for one thing bonds
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require you to lock your money up for
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extended periods of time for example if
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you buy a bond with a 10-year term
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you're committing to keeping that money
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invested for 10 years and because bonds
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are a relatively long-term investment
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you'll face what's called interest rate
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risk when you buy them as we learned
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before each bond pays a certain amount
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of interest but what happens if you buy
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a 10-year bond paying 3% interest and
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then a month later that same issuer
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offers bonds at 4% suddenly your bond
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drops in value and if you hold it you'll
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lose out on potential earnings by
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getting stuck at that lower rate
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additionally bonds aren't all that
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conducive as long-term investments
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because they won't grow in the same way
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that's because the return on investment
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that you'll get with a bond is
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substantially lower than what you'll get
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with stocks consider this between 1928
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and 2010 stocks averaged and 11.3%
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return while bonds averaged just a 5.3
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percent return now imagine you're able
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to save three hundred dollars a month
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for retirement over a 30-year period if
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you load up on bonds an average that 5.3
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percent return during that time you'll
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wind up with just over a 250,000 dollar
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nest egg but if you go with stocks
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instead and score an average annual
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eleven point three percent return on
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your investment you
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grow your retirement account to over
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750,000 dollars and that's important
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because without that growth you'll have
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a hard time keeping up with inflation
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and maintaining your buying power when
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you're older we talked before about
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mutual funds and ETFs and how they give
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you access to hundreds of companies at
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once but what if you want to buy a
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specific company that's where buying
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individual stocks comes into the picture
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you can invest in individual stocks if
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and only if you have the time and desire
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to thoroughly research and evaluate
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stocks on an ongoing basis if this is
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the case we want a hundred percent
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encourage you to do so if not it's
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totally okay to stick with ETFs and
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mutual funds and call it a day this
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video is more of a broad stroke look at
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investing basics so we're not going to
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go super in-depth on how to pick
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individual stocks but we do have a lot
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of other content on the channel about
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that here are the important concepts you
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need to understand before you get
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started only invest in businesses you
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understand avoid high-risk stocks until
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you get the hang of investing and always
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avoid penny stocks start out with
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established growing businesses with
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market leading positions for example
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Apple and Disney are great beginner
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stocks they have businesses that are
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easy to understand Apple sells I
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products and has a software marketplace
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Disney makes movies media and owns theme
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parks plus they're growing profitable
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companies that aren't going to disappear
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overnight and they both pay dividends I
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like to think the first couple stock
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purchases someone makes as a tuition
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payment and understanding how investing
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works like anything starting out
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investing is humbling and there are many
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mistakes to make along the way but if
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you choose stalwart companies like these
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you'll be able to learn how successful
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businesses operate how to read financial
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statements like an income statement and
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a balance sheet and you'll likely see
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your tuition grow as these companies
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continue to succeed if you focus on
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speculative growth companies or penny
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stocks you likely won't see your tuition
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payment back start out with a base of
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rock-solid established businesses in
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your portfolio and expand into more
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growth oriented businesses as you learn
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more for a quick checklist look for
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businesses that you can wrap your head
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around that also are growing their
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revenue have a moat or an element that
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protects them from competition and a
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management team that you believe in and
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can trust for a more in-depth look at
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how to pick stocks head over to our free
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starter kit it covers how to know you're
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ready to invest what specific metrics to
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follow and it has
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five great starter stocks you can get
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that over at fool calm slash start and
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for more information on investing in
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stocks bonds mutual funds and ETFs check
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out the episode description we've got
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links to our comprehensive guides there
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if there's anything you think I missed
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or you have an idea for a future video
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drop it down to the comment section
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below and be sure to hit that like
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button to tell YouTube that we are doing
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good stuff and subscribe to get more
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content like this in your feed thanks
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for watching and until next time fool on
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