Introduction
Successful investing takes diligent work and knowledge, like any other meaningful pursuit. Investing All-in-One For Dummies presents basic investing topics — such as building an emergency fund, determining your financial goals, and choosing a broker (if you’re not a do-it-yourself investor) — but also introduces some slightly more advanced subjects, like fundamental analysis, that can enhance your investing strategies. In between, you find the basics of investing in stocks, bonds, mutual funds, exchange-traded funds, real estate, and trends like cryptocurrencies.
This book can help you avoid the mistakes others have made and can point you in the right direction as you build your portfolio. Explore the pages of this book and find the topics that most interest you within the world of investing.
In all the years that we’ve counseled and educated investors, the single difference between success and failure, between gain and loss, has boiled down to two words: applied knowledge. Take this book as your first step in a lifelong learning adventure.
Exploring Your Investment Choices
In many parts of the world, life’s basic necessities — food, clothing, shelter, healthcare, and taxes — consume the entirety of people’s meager earnings. Although some Americans do truly struggle for basic necessities, the bigger problem for other Americans is that they consider just about everything — eating out, driving new cars, hopping on airplanes for vacation — to be a necessity.
This book is here to help you recognize that investing — that is, putting your money to work for you — is a necessity. If you want to accomplish important personal and financial goals, such as owning a home, starting your own business, helping your kids through college (and spending more time with them when they’re young), retiring comfortably, and so on, you must know how to invest well.
It’s been said, and too often quoted, that the only certainties in life are death and taxes. You can add one more to these two certainties: being confused by and ignorant about investing. Because investing is a confounding activity, you may be tempted to look with envious eyes at those people in the world who appear to be savvy with money and investing. Keep in mind that everyone starts with the same level of financial knowledge: none! No one was born knowing this stuff! The only difference between those who know and those who don’t is that those who know have either devoted their time and energy to acquiring useful knowledge about the investment world or have had their parents instill a good base of investing knowledge.
Getting Started with Investing
Before the rest of this chapter discusses the major investing alternatives, this section starts with something that’s quite basic yet important. What exactly does “investing” mean? Simply stated, investing means you have money put away for future use.
You can choose from tens of thousands of stocks, bonds, mutual funds, exchange-traded funds, and other investments. Unfortunately for the novice, and even for the experts who are honest with you, knowing the name of the investment is just the tip of the iceberg. Underneath each of these investments lurks a veritable mountain of details.
An important part of making wise investments is knowing when you have enough information to do things well on your own versus when you should hire others. For example, foreign stock markets are generally more difficult to research and understand than domestic markets. Thus, when investing overseas, hiring a good money manager, such as through a mutual or exchange-traded fund, makes more sense than going to all the time, trouble, and expense of picking individual international stocks.
This book is here to give you the information you need to make your way through the complex investment world. The rest of this chapter clears a path so you can identify the major investments, understand the strengths and weaknesses of each, and get information on seeking advice.
An important part of making wise investments is knowing when you have enough information to do things well on your own versus when you should hire others. For example, foreign stock markets are generally more difficult to research and understand than domestic markets. Thus, when investing overseas, hiring a good money manager, such as through a mutual or exchange-traded fund, makes more sense than going to all the time, trouble, and expense of picking individual international stocks.
This book is here to give you the information you need to make your way through the complex investment world. The rest of this chapter clears a path so you can identify the major investments, understand the strengths and weaknesses of each, and get information on seeking advice.
Building Wealth with Ownership Investments
If you want your money to grow faster than the rate of inflation over the long term and you don’t mind a bit of a roller-coaster ride from time to time in your investments’ values, ownership investments are for you. Ownership investments are those investments where you own an interest in some company or other asset (such as stock or real estate) that has the ability to generate revenue and profits.
Observing how the world’s richest have built their wealth is enlightening. Not surprisingly, many of the champions of wealth around the globe gained their fortunes largely through owning a piece (or all) of a successful company that they (or others) built.
In addition to owning their own businesses, many well-to-do people have built their nest eggs by investing in real estate and the stock market. With softening housing prices in many regions in the late 2000s, some folks newer to the real estate world incorrectly believe that real estate is a loser, not a long-term winner. Likewise, the stock market goes through down periods but does well over the long term. (See Chapter 2 in Book 1 for the scoop on investment risks and returns.)
And, of course, some people come into wealth through an inheritance. Even if your parents are among the rare wealthy ones and you expect them to pass on big bucks to you, you need to know how to invest that money intelligently.
‘If you understand and are comfortable with the risks and take sensible steps to diversify (you don’t put all your investment eggs in the same basket), ownership investments are the key to building wealth. For most folks to accomplish typical longer-term financial goals, such as retiring, the money that they save and invest needs to grow at a healthy clip. If you dump all your money in bank accounts that pay little if any interest, you’re more likely to fall short of your goals.
Not everyone needs to make their money grow, of course. Suppose that you inherit a significant sum and/or maintain a restrained standard of living and work well into your old age simply’
—Eric Tyson, Brendan Bradley, Brendan Bradley, Steven R. Gormley, Robert S. Griswold, Matt Krantz, Paul Mladjenovic and Russell Wild, “Investing All-in-One For Dummies”, p. 9 Chapter 2 in Book 1 for the scoop on investment risks and returns.)
And, of course, some people come into wealth through an inheritance. Even if your parents are among the rare wealthy ones and you expect them to pass on big bucks to you, you need to know how to invest that money intelligently.
Not everyone needs to make their money grow, of course. Suppose that you inherit a significant sum and/or maintain a restrained standard of living and work well into your old age simply because you enjoy doing so. In this situation, you may not need to take the risks involved with a potentially faster-growth investment. You may be more comfortable with safer investments, such as paying off your mortgage faster than necessary.
Entering the stock market
Stocks, which are shares of ownership in a company, are an example of an ownership investment. If you want to share in the growth and profits of companies like Skechers (footwear), you can! You simply buy shares of their stock through a brokerage firm. However, even if Skechers makes money in the future, you can’t guarantee that the value of its stock will increase.
Some companies today sell their stock directly to investors, allowing you to bypass brokers. You can also invest in stocks via a stock mutual fund (or an exchange-traded fund), where a fund manager decides which individual stocks to include in the fund
You don’t need an MBA or a PhD to make money in the stock market. If you can practice some simple lessons, such as making regular and systematic investments and investing in proven companies and funds while minimizing your investment expenses and taxes, you should make decent returns in the long term
However, you shouldn’t expect that you can “beat the markets,” and you certainly are not likely to beat the best professional money managers at their own full-time game. This book shows you time-proven, non-gimmicky methods to make your money grow in the stock market as well as in other financial markets. Books 3 and 5 explain more about stocks and mutual funds.
Owning real estate
People of varying economic means build wealth by investing in real estate. Owning and managing real estate is like running a small business. You need to satisfy customers (tenants), manage your costs, keep an eye on the competition, and so on. Some methods of real estate investing require more time than others, but many are proven ways to build wealth.
John, who works for a city government, and his wife, Linda, a computer analyst, have built several million dollars in investment real estate equity (the difference between the property’s market value and debts owed) over the decades. “Our parents owned rental property, and we could see what it could do for you by providing income and building wealth,” says John. Investing in real estate also appealed to John and Linda because they didn’t know anything about the stock market, so they wanted to stay away from it. The idea of leverage — making money with borrowed money — on real estate also appealed to them.
John and Linda bought their first property, a duplex, when their combined income was just $35,000 per year. Every time they moved to a new home, they kept the prior one and converted it to a rental. Now in their 50s, John and Linda own seven pieces of investment real estate and are multimillionaires. “It’s like a second retirement, having thousands in monthly income from the real estate,” says John.
John readily admits that rental real estate has its hassles. “We haven’t enjoyed getting some calls in the middle of the night, but now we have a property manager who can help with this when we’re not available. It’s also sometimes a pain finding new tenants,” he says.
Overall, John and Linda figure that they’ve been well rewarded for the time they spent and the money they invested. The income from John and Linda’s rental properties also allows them to live in a nicer home.
Generating Income from Lending Investments
Besides ownership investments (which are discussed earlier in this chapter), the other major types of investments include those in which you lend your money. Suppose that, like most people, you keep some money in a bank, either locally or online — most likely in a checking account but perhaps also in a savings account or certificate of deposit (CD). No matter what type of bank account you place your money in, you’re lending your money to the bank
How long and under what conditions you lend money to your bank depends on the specific bank and the account that you use. With a CD, you commit to lend your money to the bank for a specific length of time — perhaps six months or even one or more years. In return, the bank probably pays you a higher rate of interest than if you put your money in a bank account offering you immediate access to the money. (You may demand termination of the CD early; however, you’ll usually be penalized.)
As Book 4 discusses in more detail, you can also invest your money in bonds, another type of lending investment. When you purchase a bond that’s been issued by the government or a company, you agree to lend your money for a predetermined period of time and receive a particular rate of interest. A bond may pay you 4 percent interest over the next ten years, for example.
An investor’s return from lending investments is typically limited to the original investment plus interest payments. If you lend your money to Netflix through one of its bonds that matures in, say, ten years, and Netflix triples in size over the next decade, you won’t share in its growth. Netflix’s stockholders and employees reap the rewards of the company’s success, but as a bondholder, you don’t; you simply get interest and the face value of the bond back at maturity.
‘Many people keep too much of their money in lending investments, thus allowing others to reap the rewards of economic growth. Although lending investments appear safer because you know in advance what return you’ll receive, they aren’t that safe. The long-term risk of these seemingly safe money investments is that your money will grow too slowly to enable you to accomplish your personal financial goals. In the worst cases, the company or other institution to which you’re lending money can go under and stiff you for your loan.
—Eric Tyson, Brendan Bradley, Brendan Bradley, Steven R. Gormley, Robert S. Griswold, Matt Krantz, Paul Mladjenovic and Russell Wild, “Investing All-in-One For Dummies”, p. 12
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