What are the Best Ways to Invest Your Money?

Does the word “investing” intimidate you?

Have you ever felt that you want to invest towards a long-term goal – retirement, education or some other major goal – but don’t know where to start?

Fear not. You’re not alone.

Plenty of people wonder about the best ways to invest their money. We’re here to help answer that question.

Let’s get started with a few basic techniques that could put you in a stronger position to achieve your financial goals.

Investing: A Disciplined Approach to Saving

There’s no practical difference between the terms “saving” and “investing.” They both refer to delaying our spending from the present to the future.

When we “save,” we keep that money in cash, often because we plan on using it in the short-term future. When we “invest,” we expose that money to some higher levels of risk, usually because we don’t plan on needing that money in the near-term.

We decide to save rather than spend because we have specific goals that require money. But what’s the most intelligent way to build this wealth – especially if you’re aiming for a very long-term goal?

Understand Investing Return…and Risk

There are many investable assets that you can choose from. Each of these has different characteristics that you need to take into account.

The most important characteristics are:

(a) The types of returns you could reasonably expect over a defined time period
(b) The uncertainty, or risk, associated with those potential returns

Generally speaking, the farther in the future you’ll need the money, the more exposure you can take to riskier assets like stocks over safer, income-oriented instruments like bonds.

That said, your decisions about how to invest won’t be based solely on your timeline. They’ll also be based on your personal risk tolerance, goals and other personalized factors. Online tools like Jemstep’s Portfolio Manager can help you determine the right mix of investments based on your unique situation and preferences.

Build a Diversified Investment Portfolio

Once you are comfortable with your return and risk profile, and you understand the basic differences between higher-risk and lower-risk assets, you can start to build a portfolio.

Let’s say that you feel comfortable with a basic 70% / 30% split between stocks and bonds. (That’s a reasonable allocation for an investor with a relatively long time horizon who is moderately comfortable with risk).

You want to split those components into smaller slices, each representing a distinct asset class.

What’s An Asset Class?

Did that last sentence sound befuddling?

Are you thinking: “What’s an asset class?”

An “asset class” is a group of securities that have similar characteristics. The “Big Three” are equities (stocks), fixed-income (bonds), and cash equivalents (CD’s, money market accounts, etc.)

“Oh,” you’re probably thinking. “Well, why didn’t you just say ‘stocks, bonds and cash’?”

Because there are many smaller asset classes within each major class.

Let’s look at equities, for example. You can divide stock funds based on their “style,” such as large-cap, mid-cap and small-cap funds. You could also divide them based on sector, such as technologies, utilities, or health care. Or you could divide them based on geography, such as domestic U.S. stocks, developed market stocks (e.g. Europe) and emerging international markets (e.g. China, Brazil).

Fixed-income asset classes can be divided up based on how much time it takes for the bond to mature. Or they can be divided by their credit quality, currency, and geographic location.

There are also other asset classes, broadly referred to as “alternatives,” that include various types of commodities, real estate trusts, and master limited partnerships, among others.

As you can see, there’s a long list of asset classes for you to choose from. Services like Portfolio Manager can wade through this huge menu of asset classes, and help you build a diverse portfolio to achieve your personal goals.

Choose the Right Vehicle

You can use many vehicles to invest your money. The most optimal location for your investments are based on the specifics of your investment goals.

If you are investing for retirement, for example, you want to maximize the tax benefits that you can gain from 401(k) or IRA plans. If you’re investing for an educational goal, you might benefit from a 529 plan structure.

Pay attention to the structure of your investment vehicles. These benefits can add up over time.

Be Diligent About Costs

Investing costs money. You can’t avoid the fees and expenses that come with the territory. But there are plenty of things you can do to make sure you’re paying reasonable costs for what you are getting.

Read the fine print (where lots of the details about management fees, sales loads and other costs can be buried). Compare any prospective investment with its average peer group costs.

Remember that every dollar that goes into the pocket of a financial professional is a dollar less for you.

Stay Disciplined

Investing is a marathon. Keep a steady pace, and stick to your allocation strategy.

Sure, you’ll make small changes over time to keep your target asset allocation and as you get closer to the “deadline” for your goals.

If the market drops, don’t panic. Selling after a severe market crash can turn paper losses into actual losses. Stay focused on the goal.

Smart investing is mostly about common sense and good habits. Develop these, and you’ll be in a good position to invest your money wisely.

Have you started to invest for the future? Tell us what you think.