Simple Investing Tips

People often say that they don't have enough money to invest. That may be true for some people who do struggle to make ends meet. But for many others it's just a matter of reallocating funds to make investing a priority. These people are more motivated to make investing a priority when they realize the enormous benefits some investments yield in the long run. It truly does not take a large sum of money to start investing. If you bought cheap stock and bond index funds with every pay check, your money will start gaining momentum; much faster than a savings account. It all comes down to compounding interest. To become a great investor, you need to understand the "Rule of 72."

The Rule of 72

The Rule of 72 is a common term regularly used in the investment world. It is a financial rule of thumb that predicts how many years it will take to double your money based on different interest rates. For instance, if you have $5,000 and want to know how long it will take to double that amount, say at a 3% interest rate, you would divide 3 into 72 which equals 24. It will take 24 years to double your money. If you find an investment that yields 9%, divide 9 into 72 which equals 8 years. You get the idea. The higher the interest rate, the shorter it will take to double your money. Keep in mind, however; higher interest rates means more risk. But, if you are getting up there in age, and don't have a very strong stock portfolio, you may have to take some risks. You don't have the same luxury as younger investors who have time on their side. They are able to invest a relatively small amount into a safe, lower interest account, and just wait for the compounded interest to go to work.

The Rule of 115

A lesser known term, but still equally as valuable is the Rule of 115; which tells you how long it will take to triple your money. For example, if you have $5,000 today earning an 8% rate of return, you will have $15,000 14.4 years from now, and $45,000 28.8 years from now. You can see by these examples the power of compounding interest and why it is so beneficial to start investing as soon as you can.

Make Investments Automatic

Take a set amount out of your paycheck each month and invest it. This is referred to as dollar-cost averaging. By investing a certain amount every month, you can buy more shares when the prices are low and less shares when the prices are high, but over time, dollar-cost averaging should result in a lower cost per share over time, which maximizes your money. A good example is a 401(k) match. If you invest a certain amount each month into your 401(k), you are consistently investing, regardless of what is going on in the stock market. Again, there will be ups and downs, but slow and steady finishes the race.

Don't Try to Time the Market

Frequently switching your investments, or buying and selling often to try to get in and out of the market at the so called "right time," can really hurt your investment returns. Studies show that when investors do try to time the market, historical data suggests that they both increase and lower risk, just at the wrong times.

Diversify

It's a well known fact the best way to reduce the risk of investing is to diversify your money over different types of investments. This way, if one type performs poorly one year, there's a good chance that another will perform well, helping to balance out your losses. The following year, these results could flip flop. But in the end, the more diverse your investments, the more likely you are to come out on top.

Investing in Mutual Funds

A mutual fund is a collection of assets held by multiple investors for the purpose of investing. The fund most often consists of a mixture of stocks, bonds, cash, and other securities, and is managed by a professional. Buying into a mutual fund is a simple way for people interested in investing to develop a diverse portfolio that is carefully watched over and tended to by a fund manager.