The most reliable strategy to grow wealth over time is to invest your money. Before you put your hard-earned cash into an investment vehicle, you’ll need a basic understanding of how to invest your money the right way. Here are some of the best ways to invest money:
There is, however, no one-size-fits-all solution. The best way to invest your money is whichever way works best for you. Consider the following factors to help you figure it out:
Your risk tolerance
1. Your Style- How much time do you want to put into investing your money?
When it comes to strategies to invest money, the investing world is divided into two camps: active investment and passive investing. Both strategies have value as long as you focus on the long term rather than the short term. However, depending on your lifestyle, money, risk tolerance, and hobbies, you may choose one over another.
Active investing means taking time to research investments yourself and constructing and maintaining your portfolio on your own. If you plan to buy and sell individual stocks through an online broker, you're planning to be an active investor.
Passive Investing is the equivalent of putting an airplane on autopilot versus flying it manually. You'll still get good results over the long run, and the effort required is far less. In a nutshell, passive investing involves putting your money to work in investment vehicles where someone else is doing the hard work -- mutual fund investing is an example of this strategy.
2. Your budget – How much money do you have to invest?
You may think you need a large sum of money to start a portfolio, but you can begin investing with $100. One important step to take before investing is to establish an emergency fund. This is cash set aside in a form that makes it available for quick withdrawal. All investments, whether stocks, mutual funds, or real estate, have some level of risk, and you never want to find yourself forced to divest (or sell) these investments in a time of need. The emergency fund is your safety net to avoid this.
The majority of financial experts recommend setting aside enough money for an emergency fund to cover six months' worth of spending. While this is a wonderful goal, you don't need to set aside this much money before you can invest; the idea is that you don't want to have to sell your assets every time you face another unexpected expenditure.
3. Your risk tolerance – How much financial risk are you willing to take?
Not all investments are successful. Each type of investment has its own level of risk -- but this risk is often correlated with returns. It’s important to find a balance between maximizing the returns on your money and finding a risk level you are comfortable with.
One good solution for beginners is using a robo-advisor to formulate an investment plan that meets your risk tolerance and financial goals. In a nutshell, a robo-advisor is a service offered by a brokerage that will construct and maintain a portfolio of stock- and bond-based index funds designed to maximize your return potential while keeping your risk level appropriate for your needs.