What is Investing?

In the simplest terms:

The asset you put money into could be stocks that reward you with dividends, real estate that pays you rental income, or maybe it's the newest Dogecoin which hopefully appreciates, shoots to the moon, and can be sold for millions of dollars more than you bought it for.

Risks and Returns

When we invest, we do so with the expectation that we'll get some sort of return. The spectrum of return you can expect, like the range of existing investment vehicles, is extremely wide. Some investments might bring you a 10 times return while another sends your initial monetary allocation all the way down to 0. Scary...

WAIT! You might be thinking; I thought investing is where your money makes MORE money for you not less. Well that's why I said you allocate money "in the hopes" that this is true. The truth of the matter is your returns on your investments can be profits and losses and vary greatly, even within the same asset class.

Well why does it vary so much, and how can I invest properly?

The answer to both these questions lies in understanding RISK.

A fundamental principle of investing is that risk and return are two sides of the same coin. You may have the heard the quote:

The higher the risk, the higher the reward

Generally speaking, higher risk means higher expected return and low risk equates to a lower expected return. For example, bonds and Certificates of Deposit (CDs) are seen as low risk because they are backed by the government, a stable entity, and therefore produce low returns. Then we have assets like stocks and real estate which are seen as more risky but having larger returns than bonds or CDs.

No matter which asset you invest in, I find it prudent to always keep in mind this concept of risk and return when evaluating the investments that are right for you. Every investor has their own risk tolerance; some are willing to invest just a fraction of their wealth while others are comfortable going all in on a single asset.

I can't tell you where your risk tolerance lies, only you know the answer; but once you know where your line is, evaluate the risks of your own investment portfolio and make sure they both match.

What's In My Investment Return?

Returns are broken into two main parts: Capital Appreciation and Income.

Capital Appreciation is when our assets appreciate, or increase in price. For example when Apple outperforms their projections, the stock you bought at $150 a share might appreciate to $160 a share.
Income on the other hand is money received for holding or utilizing an asset. It may come in different forms depending on the asset you hold. Stocks may pay you quarterly dividends, real estate you own may net you some money in the form of rent, and your staked cryptocurrency may pay you back in the form of rewards.

So together:

Return = Capital Appreciation + Income

To be a successful investor,  you will want to have an asset that will either have positive capital appreciation, generated income, or a combination of both.

Investing Is A Powerful Tool

At the end of the day investing really is an extremely powerful tool that anyone can use to gain true financial freedom. Whether your financial goal is to pay off your debts, be able to afford college, or have enough money to buy your dream house, investing will help you reach your goal.

We all know how to work for money, how to spend it, but many of us don't know how to employ it. Investing is the art of making your money work for you. The sad truth is we're often not taught this art in schools or in our daily lives. But, when you finally do get started on investing and making returns, it will feel liberating.

How To Invest

Broadly, you can categorize investing into three categories: Do-It-Yourself (DIY) Investing, Professionally Managed Investing, and Robo-Advisor Investing.

DIY Investing
DIY investing involves you being the master of your money. You decide where to allocate it, how to spend it, and how to manage it. The great thing is DIY investing is something all of us can start right now. By managing your investments by yourself, you reduce fees and costs that you would otherwise pay for someone to manage your money for you.

Professionally Managed Investing
Generally this involves wealth managers or financial advisors who you pay to research and make decisions for you in terms of where and how to invest your own money. Although you pay them for their services, if you believe in their investing abilities, the benefit is that they do the work for you to make returns.

Robo-Advisor Investing
This last category has been on the rise in recent years and is a new form of how to invest your money. Generally this is an automated, algorithm-powered financial investing service that invests your money based off of your financial situation, goals, and risk tolerance. Robo-Advisors like SoFi will help you with things like goal planning, auto-blancing of your portfolio, and diversification.The benefit here is that fees are less than wealth managers or financial advisors.

Although all three are valid ways to start investing, the path I suggest, and mainly take, is DIY Investing. You'll find that I advocate for this method because I firmly believe that we all should have some knowledge, control, and power over our own finances. If we work most of our lives to earn money, why should we not know anything about how to actually use it to earn more money for us.

It's also been shown by statistics that many professionally managed investments, like mutual funds, don't do any better than the average investor. Many of the ETF's I've invested in have been able to beat out these "professionals" time and time again.

Start Investing Now

Now that you've learned that investing is all about the balance of risks and returns, maximizing a combination of capital appreciation and income, and ultimately a powerful tool for liberating yourself, you have the knowledge to get started investing now. You've already taken a huge step forward!

I beg you to make this sentence your takeaway from all of this. I even wrote a whole other post on why I stand by this statement.

The world of investing is huge with many different options and strategies, and learning about it can sometimes be extremely daunting and exhausting.

As YourAverageInvestor, I can tell you that I've also felt those same emotions, but have also experienced excitement and the power that comes with delving deeper into it. Like you, I'm still learning everyday, so come along the journey with me. Whether that means making your first monetary investment, learning through other YourAverageInvestor posts, or just actively thinking about how to begin,

Start Investing Now!