This is an article about how to get your money making money for you so you can retire early! There are articles, upon books, upon manifestos trying to figure out the BEST way to invest money. Most people choose to spread their money out across Stocks, Bonds, Gold, Cash, and Real Estate. Those are the 5 main categories that have stuck around through history. The way you split up your money is called your Asset Allocation.Recently crypto-currencies are all the rage as part of an asset allocation plan, but in the past everything from tulips to beanie babies made the cut. I'm mostly going to talk about stocks in this post.
Let's start by defining a stock and the stock market. When you trust a company, you can buy a share of it and the company rewards you for giving them money by paying you back interest and dividends. You then own stock in that company. All of these transactions come together to form the stock market, and the place where they are traded is called the stock exchange (e.g. the New York Stock Exchange). Us regular people trade them through investment brokers either in person at a local firm, or on the internet with a site like Vanguard, Fidelity, or Betterment.
But...stocks are super risky, right? What about 1929? and 1987? and 1990?!! and 2000!!!!??? AND 2008!!!??? With so many stock market crashes, it's easy to see why people are skittish and feel scared to invest in the stock market. There are two things we KNOW will happen to the stock market- it will go up and it will go down, sometimes in very volatile ways that are thrilling and/or scary. Many people don't want to play this game, so they use the other methods I mentioned before- bonds, cash, gold, and real estate. That's fine as long as you realize that all of these other methods have a level of risk as well- bond values can go down, cash loses to inflation, gold right now is near an all time low, and real estate can tank (like in 2008, for example). Honestly, the best way to invest your money is whatever makes you most comfortable. I do a little of everything but my current emphasis is heavy on stocks. In the future I plan to add in more real estate by owning a home and maybe some rental properties. I also plan to increase my bond exposure as I get older. But lets get back to the discussion on stocks.
No one knows when the ups or downs in the Stock Market will come. Turn off the talking heads on TV. They don't know. If you have money laying around and you want it to work for you but the market is "up", it's actually a good time to buy! Several years from now it will be even higher, and you don't want to miss out on those sweet gains. The market reaches a new high 7 times per year on average, so there's no better time to get in than the present. If the market is "down" then that is also great news! You are getting your stocks on sale and getting more shares for your money.
The one thing you DON'T want to do is sell your stocks at a price that is less than what you paid for it. Maybe you've heard of the phrase, "Buy low, Sell high"? Travel back in time with me for a moment...to 2008. The market lost 30% of it's value in 2008. That would have been a terrible time to sell, but a great time to buy. The people who truly lost money are the ones that took all their money out in 2008 because they sold low. It would have been better for them to buy MORE! I know that's scary and counter intuitive, but since that low point in 2009 the market is up 149%. People who didn't get back in the market missed a huge opportunity to buy low, sell high, and make a lot of money.
The main rule of thumb that investment professionals give that I agree with, is that you should not be investing money you will need in the next 5 years. So for example, if I was saving for a house and wanted to buy next year, I would not put the money for a down payment in the market due to high risk. I would instead put it in a low risk, low interest savings account in cash, or maybe in CDs. Thus, during this time of saving my Asset Allocation would have a heavier cash position because I wouldn't want that chunk of money subjected to the volatility of the market.
I think that's enough for this article, but keep reading HERE to find out what stocks I recommend to invest in so you can retire early!
*Disclaimer. I am not professionally licensed in the financial industry in any capacity. I am not licensed to do anything except drive a car and be a speech therapist. You invest at your own risk, and past stock performance is not a guarantee of future stock performance. *