How To Invest Money Now In 3 Seemingly Simple Steps

Why you need to invest

Investing can seem confusing and intimidating, especially when you first start. From the unfamiliar jargon, like ETFs (stay with us! We’ll explain ETFs in a bit), to the seemingly endless buffet of options, e.g., real estate, mutual funds, commodities, bonds, and more.

Knowing where to start or how to get the best result for your goals can be challenging. In addition, between rent, student loans, or childcare, it can feel like there’s no money left to invest. 

Gallup finds that although 58% of Americans own stock, this number changes dramatically at lower income levels. If you earn $100,000 or more, you are 3.5 times more likely to own stock (89% own stock) than if you make less than $40,000 (25% own stock). 

If you earn $100,000 or more, you are 3.5 times more likely to own stock than if you make less than $40,000

Even for seasoned investors, investing can be tricky. The S&P Indices versus Active (SPIVA) Scorecard measures the performance of actively managed funds against their benchmarks.

In simple English, SPIVA checks whether having an investment expert pick stocks gets you better results than buying all the stocks in a market. Most times, the answer is no. Most fund managers do worse than the market – in 2022, 51% of fund managers did worse than the market. That number was 85% in 2021.

For those who outperform the market, it is tricky to keep it up. Over the last 5 years, only 13.5% of large-cap funds in the US performed better than the market. If you look back 15 years, that percentage drops to 6.6%.

So where does that leave us? You might be tempted to say, “Well, if the pros can’t do it, why should I invest?” To answer that, let’s consider the stories of Marly and Meredith going back 15 years.  

Marly and Meredith

It’s March 31st, 2008, Bear Sterns has failed, and we are in the middle of a financial crisis. Both Marly and Meredith want to build a nest egg to help them handle an emergency or unexpected expenses.

Investing makes Marly anxious. She is worried about losing money, so she does not invest. She saves $100 every month. 15 years later, in March 2023, Marly has saved $18,000. 

Meredith is also worried about investing during a financial crisis. She decides to invest in an exchange-traded fund (ETF) that tracks the whole stock market. An ETF acts like a stock in that you can trade it at anytime but it also acts like a low cost mutual fund because it is a basket of many assets (e.g. stocks or bonds) to reduce risk (told you we’d explain it!). Whether the market goes up or down, she puts $100 each month into VTI, a Vanguard ETF. 15 years later, in March 2023, Meredith has $46,975 for her nest egg.

Despite the 2007-2009 financial crisis and the COVID-19 pandemic, Meredith ends up with more than 2.6x more money than Marly by investing and leaving her money alone to grow undisturbed. You don’t need to beat the market to do well in investing – doing as well as the market is good enough.

The secret of building wealth is to invest. You can invest in real estate, active mutual funds, passive ETFs, or even gold, depending on your goals and interests. What you invest in matters less than investing consistently for a long time to let the magic of compounding grow your money. 

Investing can be simple. You can start small with whatever you have, spend no more than 10 mins a month, and still get a massive impact from investing. Meredith invested only $100 a month and had about $47,000 at the end of 15 years. 

Now let’s make sure we are on the same page on what investing means. Sometimes you may be speculating rather than investing.

Investing can be simple. You can start small with whatever you have, spend no more than 10 mins a month, and still get a massive impact from investing

The difference between investing and speculating

Any strategy that grows your money and has a higher chance of preserving rather than losing your principal (the amount you put in) is an investment. 

The key difference between investing and speculating is the amount of risk you take. When you invest, you minimize risk as much as possible, e.g., by diversifying your investments (investing in different types of assets that rise and fall in different patterns) or by doing your research to understand why an asset (what you want to invest in) will achieve your investing goals.

Speculation is a high-risk, high-reward proposition where you have a much greater chance of losing your money than growing it. The probability of failure is higher than the probability of success. 

Both investing and speculating involve risk and luck but speculating relies on both much more. You’re more likely to lose when you speculate and more likely to win when you invest.

Investors rely on time and an understanding of what creates value, e.g., a profitable company with a significant market share in an industry that is growing or a rental property next to a large employer in a city with a growing population. 

On the other hand, speculators rely on hunches and luck, e.g., day trading a stock you think might go up. Unless you have insider information (which is illegal), too many factors affect an individual stock’s price for you to know whether it will go up or not and by how much on any particular day. 

The key difference between investing and speculating is the amount of risk you take. 

Very few people make money speculating in the long term. If you want to try speculating, only use money you can afford to lose. 

This article focuses on investing. By investing, we mean researching assets and only buying when you expect an asset to generate income or increase in value over time. Investing means taking calculated risks where the odds are highly favorable long term. 

Now let’s talk about how to invest.

How to invest in 3 seemingly simple steps

Investing is not a one-size-fits-all undertaking. What works for one person may not work for another – your goals could be different, or how much risk you are comfortable with may vary. 

Jane and Judy can both invest in real estate but choose completely different approaches based on their goals, risk tolerance, time horizon, and personal preferences. 

For example, Jane likes to fix things and has 10 to 20 hours of free time a week. She wants her investments to generate enough cash to cover her expenses in 5 years. Jane buys property, fixes it up, and rents it out. She continues until she owns 10 units. After paying her mortgage and income taxes on her rental income, she has enough money to cover her expenses. 

Meanwhile, Judy works 50 hours a week and wants to spend as little time as possible investing. She wants to save for retirement in 25 years and keep her taxes as low as possible when she retires. Judy invests $2000 automatically each month in real estate investment trusts (REITs) through a Roth 401K and Roth IRA. She reinvests the dividends from her REITs. Her investments grow undisturbed for 25 years. When she retires, she can withdraw from her accounts tax-free.

These two examples show two approaches. There are many more approaches in real estate investing, not to talk of the wider world of investing. 

Below, we cover how to invest in three seemingly simple steps:

1) Set your investing goal

We invest for different reasons. Your goals affect which investment options will work for you. 

Some investments, like 12-month certificates of deposit (CDs), return your money in a year. In contrast, others, like, investing in venture capital funds (these funds invest in startups with long-term growth potential), require 8 to 14 years to return your money. 

Some investments focus on generating income, while others focus on increasing value and minimizing income taxes. 

The first step in investing is to determine your goal. Your goal should factor in your time, risk tolerance, and preferences. Ask yourself the following questions:

• • Time: When will I need to withdraw this money? How much time can I devote to researching and managing my investments?

• • Risk tolerance: Can I bear to see my investment fluctuate in value? What level of fluctuation am I comfortable with? What is essential for my peace of mind? What will I worry about? What would prevent me from sleeping soundly at night? For example, am I comfortable taking on debt like a mortgage? Can I handle losing 10% or 20% of my investment value when markets fall and not be tempted to abandon my long-term investment strategy?

• • Preferences: Do I want my investments to generate income or appreciate (increase in value)? Do I prefer physical assets or digital assets? Am I interested in a particular sector or industry? Do I want to spend time actively managing my investments, or do I prefer passive assets?

After reflecting, decide on your investment goal. I recommend starting with one goal if you are new to investing. Pick the most important goal to start with. As you get comfortable and understand your preferences better, you can expand to more goals and create a portfolio of investments to meet your different goals.

For example, I invest long-term for retirement in 30 years. I first started by investing in a passive index fund in my 401K. As I learned more, I expanded to invest in ETFs, a few individual stocks, real estate, angel investing, and art investing. I would have felt overwhelmed if I tried to do all this at the same time. 

2) Pick investments that align with your goal

After you decide on a goal, look for investments that will meet your goal. For example, if your goal is to invest your savings in the short term for a down payment on a house, you will choose different investments from someone whose goal is to invest long-term for a child’s college education. 

See the chart below for examples of investment options by time horizon (short vs. long term) and type (income vs. appreciation)

As you evaluate investment options, consider the following:

• • Desired result + margin of error: Will this investment option reach your goal? For instance, if you want $250K in 10 years, how much will you need to invest to get there, making reasonable assumptions? Remember that past performance does not equal future performance; anything can happen. No one expected there to be a global pandemic in 2020. Build a comfortable margin of error to accommodate what you don’t know and can’t control.

• • Taxes: What are the tax implications of your investment? Can you minimize your taxes by using tax-advantaged accounts like 401Ks and IRAs for assets like REITs that pay annual dividends (which you pay income taxes on each year)?

• • Fees: What are the fees involved? Fees eat away at your return. The less you pay in fees, the more investment return you keep.

3) Manage your emotions as you invest

Managing your emotions as you invest is the most critical yet hardest step. Many investors “buy high and sell low” when you want to do the opposite – “buy low and sell high.” 

When the market is rising, word travels, and investors buy into the market. The market continues to rise, and more investors continue buying. At some point, sentiments or the economy change, prices fall, investors sell, and prices continue falling. 

Depending on when you bought and sold in this cycle, you could have paid too much for an asset and sold it at a loss. This doesn’t mean you should never sell – sometimes, an investment strategy doesn’t work, and you should sell. It also doesn’t mean you should try to time the market (that doesn’t work). The point is that your investment strategy, rather than your emotions, should drive when to buy or sell an asset.

If you are clear on your investment goals and understand how your asset will deliver value over time, it’s easier to resist the urge to sell when the media and everyone around you panic. This is easy to say and difficult to practice, as investing is much more about psychology than it is about numbers and calculations. 

When you choose an investment strategy that aligns with your goals, risk tolerance, and personal preferences, it’s easier to manage your emotions and stick with your strategy until you reach your goal. When you have clarity on why you are investing and your investment approach aligns with your goals and who you are, it is much easier to stay the course.

Managing your emotions as you invest is the most critical yet hardest step.

For example, I do most of my investing automatically. I buy the same ETFs monthly, no matter what happens in the market. I don’t follow the news or track what the stock market does daily. I picked ETFs that I was comfortable holding for 30 years. After that, I set up automatic investments and check once or twice a year to see if I need to make any adjustments. 

This approach works for me. It may or may not work for you, depending on who you are and what you want to achieve. Find what works for you and stick to it. 

Recap

The three steps to invest (set a goal, pick investments that align with your goal and manage your emotions as you invest) seem simple but require personal reflection, sound research, and patience to carry out. 

Investing is a powerful tool to build wealth and achieve financial success. By following these steps and developing a well-thought-out investment plan that aligns with you and your goals, you can ensure your investments work hard for you and your financial future.

Remember to start by setting goals based on your time horizon, risk tolerance, and personal preferences. Then pick investments that align with your goals. And most importantly, manage your emotions and stay committed to your long-term investment strategy, and you’ll be on your way to achieving financial success.