When it comes to investing, realize that risk and reward tend to move in opposite directions. If you take more risks, you run a larger chance of losing your money, but you often have a higher upside.
It’s possible to invest without losing money. In the current market, where interest rates are very low, any investment guaranteed to not lose money will have a very small return.
For most people thinking about investing, the goal is to minimize the potential for losses while maximizing how much you might make. Exactly how you do that — and where you put your money — depends a lot on what type of investor you are, and what your goals are.
There is no one answer
A 67-year-old looking to live off his or her investments has different needs from a 22-year-old planning to work about 45 or so years. In addition, someone with a lot of excess income has different needs from someone struggling to make ends meet.
Whether you’re starting small, even with a few dollars each week, you’ll want to have a diverse portfolio. That means owning not only stocks, but also bonds, cash, and even alternatives such as shares in a real estate investment trust (REIT).
Even within your stock portfolio, you’ll want to diversify. That means owning shares of companies in multiple industries, as well as shares in operations of multiple sizes. By not having all your eggs in one basket, you give yourself protection against outside forces. For example, an event that hurts oil stocks — perhaps a breakthrough in electric-car technology — may benefit shares in parts of the technology sector.
How to be safe
The safest way to invest without losing money is buying cash equivalents. Money markets, Treasuries, certificates of deposit (CDs), and corporate bonds offer generally stable returns with very limited risk, and in some cases no risk at all. The problem is that safety comes with a price.
CDs, to examine one cash equivalent, constitute an agreement in which you give your money to a financial institution for a period of time in exchange for a set interest rate. Perhaps you will receive 2% for a 12-month CD and slightly more for longer periods. These are safe investments, but they also have no upside beyond whatever interest rate you’re being paid.
Is the stock market safe?
Investing in individual stocks comes with risks. A company can lose value, or it can even go bankrupt. In the long run, however, the market itself has steadily gone up.
Investing for the the short term comes with risk. Any company, even a very good one with a long history, can experience a big drop in share price, sometimes for reasons it doesn’t control.
In the long run, however, those blips don’t matter. Over 10 years, 20 years, or even longer, the market rises. Either build a diverse portfolio with which, over time, even your mistakes will be covered up, or buy index funds that track a particular market segment, or even an entire exchange.
Most importantly, perhaps, when you buy individual companies, follow the classic saying “buy what you know.” That means, don’t chase trends or follow tips from someone else if you don’t understand what you’re buying.
Start with the companies you love — the ones with which you happily do business. You don’t need to know the ins and outs of a company’s financials, but it’s also smart to read up before buying. See what the company says about its plans and prospects while also looking at whether outside analysts agree with those statements.
Time is your friend
If you have money you expect to need in the next 12 months, keep it in cash, ideally in an account with no fees that pays interest, even though the amount paid will be tiny. Even that seemingly safe investment runs the risk that your cash will lose buying power because of inflation, but in that scenario, you’ve lost value but haven’t technically lost money.
The reality is that there’s no entirely safe way to invest that offers attractive returns. Instead, there are ways to manage how much risk you have and mitigate any short-term volatility by having a long-range outlook.
Investing in the stock market gives the average person the best chance of achieving significant long-term gains. Having a diversified portfolio is important, but the real secret ingredient is time.
Manage your portfolio, tend to it, add stocks, and even sell shares if something fundamentally changes at a company you once believed in. Don’t, however, worry about whether your portfolio or shares in a company you own experience a downturn in the short term. Be involved and informed, but be patient. History shows that over time, your patience will pay off.