Investing Doesn’t Have to be Scary
The air is crisp, the leaves are changing—it’s time for jack-o-lanterns, spiderwebs, witches, horror movies and…Halloween! As all things spooky enter the spotlight, there’s no better time to face your fears. And if investing is one of them, we’re here to let you know that investing doesn’t have to be scary.
In one survey, SoFi found that 56% of millennial women say that fear holds them back from investing. But investing, as part of an overall financial plan, can help you grow your wealth. When armed with the proper information and assistance you can conquer your stock market fear. That way you have more time for Halloween costumes, candy, and trick-or-treating.
The Difference Between Saving and Investing
The first step in conquering any fear is arming yourself with knowledge. The dark can be terrifying—until you turn on a light. If you are intimidated by the thought of investing, taking the time to understand what investing is and how it works can relieve quite a bit of stress. Often times people use the words saving and investing interchangeably, but it’s important to recognize that they don’t actually mean the same thing.
Saving is just incrementally setting aside money for emergencies or the future. Your savings for immediate purchases and emergency fund are typically kept in a savings account or some other cash equivalent account where money can be easily accessed.
Investing is when you take a portion of your money and use it to buy stocks, bonds, mutual funds, or real estate, with the hope that these investments will earn a solid return. This strategy is most often used to reach long-term goals.
Unlike money you save in an FDIC-insured account, the money you invest in stocks, mutual funds, and other accounts is not federally insured. But when you invest, you have the opportunity to earn more money than you would in a traditional savings account.
Why Should You Invest?
Before you begin investing, consider building an emergency fund. Once you’ve stocked away enough cash for an unexpected rainy day it’s also advisable to start saving for retirement. You can do this through your employer-sponsored 401k plan, an IRA, or a combination of the two. In reality, when you save for retirement using a 401k or IRA, you are already investing.
Both 401ks and IRAs are tax-advantaged investment accounts , meaning there are certain tax incentives that encourage you to use them. These accounts offer a great start to investing and saving for retirement, but they come with contribution limits. Another downside of both 401ks and IRAs is limits on withdrawals. Since the accounts are intended to be used to save for retirement, there are strict age limits on when you can begin taking withdrawals. If you make withdrawals before these age limits, you’ll pay penalties and withdrawal fees.
After you’ve set up your emergency fund and retirement savings plan, the next step on your investment journey should be to evaluate your goals. Investing is best suited for longer-term goals, like saving for a child’s college education, to buy a house, to start a business, or for a dream vacation. Once you’ve determined your financial goals and reasons for investing, do some research to figure out what types of investments may be best for your financial goals.
Don’t Be Spooked by Investing
Investing involves risk. There’s no way around it, but that’s no reason to be spooked. Don’t let fear paralyze you. Investing is all about understanding risk, knowing how much you are prepared to take, and choosing the right investments based on the level of risk you are comfortable with.
The higher the risk of your investment, the higher the potential return, but as with anything risky, you may not get that money back. As you evaluate your risk tolerance you’ll want to consider the timeline you’ve set for your goals. Generally, the longer the time horizon, the more risk you can stand to take, because you have more time to recover from downturns in the market.
One of the biggest benefits to investing is compounding , which happens when your investment grows each year. When those earnings are reinvested, your investments’ earnings generate earnings of their own. Over time, this can help your investments grow. Compounding can be especially powerful if you began investing at a young age.
One way to help limit your risk is through diversification—which means spreading your money across different asset classes, such as stocks, bonds, and real estate, instead of concentrating it all in one area. It also involves diversifying how you spend money in each sector. If you’re just getting started, that could mean investing in low-cost mutual funds or ETFs.
So, What Am I Actually Investing In?
There are a wide variety of assets that you can invest in. Here are a few to consider as you get started on your investing journey:
A mutual fund is a professionally managed investment that pools your money with other investors. The fund’s managers then use the money to buy securities for the group. They can be a good way to get people started investing with minimal amounts of money. The biggest benefit to this type of fund is instant diversification. Mutual funds can invest in stocks, bonds, real estate, commodities, and more. There are over 20,000 mutual funds that cover almost every investing strategy out there, so you can almost certainly find one that matches your investment goals. The risk associated with mutual funds depends on the kind of mutual fund you’re invested in. For example, if the fund is comprised of foreign stocks, your investments are subject to foreign market volatility. If your fund focuses on fixed income securities, those sometimes dip when interest rates rise.
Exchange Traded Funds
Exchange traded funds, or ETFs, are similar to mutual funds in that they offer a variety of securities through the purchase of just one fund. ETFs provide low-cost access to markets, allowing investors to build a relatively low cost and effective DIY portfolios to suit their needs and goals. Similar to mutual funds, the volatility of ETFs is related to the stocks in your chosen ETFs.
When you buy shares of a company’s stock , you own a piece of that company. This gives the buyer the opportunity to participate in the company’s success as the stock price increases and the company declares any dividends. A dividend is a distribution of a portion of the company’s earnings. It’s decided by the board of directors and paid to its shareholders. Stocks are subject to two kinds of risk: unsystematic and systematic. Systematic risk is the risk of potential market decline, whereas unsystematic risk is volatility for individual stocks.
A bond is a loan—but you do the lending. You loan your money to a company, city, or the government, and they promise to pay you back in full with regular interest payments. Of course, you’re taking a risk with bonds because the bond market can decline, which has been known to happen when interest rates rise. Increasing interest rates can lower bond prices.
You can buy property to live in, or buy property to generate investment income. The latter is a long-term investment that investors use for cash flow; the money made from renting out the property. Over time, cash flow could increase because the cost of rent may increase in your neighborhood, while your mortgage payments will remain the same. Risks associated with real estate are two fold: there’s liquidity risk and market risk. Predictably, the real estate market can decline (that’s market risk). But you also run the risk of needing cash flow but not having access to your wealth because it’s tied up in your property investment (liquidity risk).
An alternative to becoming a property owner or landlord is a Real Estate Investment Trust, or REIT . REITs are publicly traded companies that own income-producing real estate. They give us the chance to invest in real estate portfolios. REITs sometimes come at a higher risk than other funds.
Ready to Get Started?
If you’re ready to start investing, you may want to consult a financial advisor who can provide you with an investment plan tailored to your goals, risk profile, and current financial situation. If you choose to go this route, you should know that there will be a cost associated .
Financial advisors charge for their services in a few different ways, as a percentage of assets managed, at an hourly rate, with fixed fees, on commission, or with performance-based fees.
Another option would be to invest with a brokerage account. Once you’ve deposited money into a brokerage account, you can begin buying assets like stocks, bonds, and mutual funds. If you plan on purchasing and managing your own investments, a brokerage account could be a good choice for you.
Investing with SoFi Invest
At SoFi, we believe that everyone should have access to wealth management. You can begin investing with as little as $100 and there are no management fees. SoFi Invest blends the best of automated investing with advice from human advisors. When you invest with SoFi you’ll have access to a team of financial advisors who can help you set goals and determine your risk tolerance.
Portfolios are recommended based on your age, income, risk tolerance and assets, and we invest in a mix of low-cost, index-based exchange-traded funds (ETFs). SoFi’s ETFs track more than 20 indexes.
And we’ll manage the portfolio for you, automatically rebalancing the investment account to stay in line with your preferred risk tolerance. SoFi Invest allows people to easily and intelligently invest in tax-efficient portfolios designed for the long term.
SoFi can’t guarantee future financial performance. Past performance is no guarantee of future financial results.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.