Are You Making Investing Too Complicated?
Laura answers a common question about how to start investing and which investments to choose.
A common question I receive is, “Investing seems so complicated and risky. How do I get started and what are the best investments to make?”
While investing can be both complicated and risky, it doesn’t have to be.
In this episode, I’ll cut through the confusion that may be preventing you from investing. I’ll make it simple, so you can invest confidently and wisely.
Free Resource: Laura's Recommended Tools—over 40 of the best ways to earn more, save more, and accomplish more with your money!
Why Investing Seems Complicated
Investors have a lot of choices these days: thousands of actively traded stocks; over a thousand exchange-traded funds; tens of thousands of mutual funds; and endless tangible options, such as real estate and precious metals.
While it’s fantastic to have so many choices, the abundance of opportunities can be daunting. It reminds me of the famous jam study where grocery store customers were offered different flavored jams to sample, along with a coupon to buy one jar.
Regardless of whether the researchers put out a large assortment of 24 jams or just six of them, customers only tasted two different jams. Most customers were drawn to a larger assortment of jams, but fewer of them purchased a jar.
On the other hand, the segment of customers who sampled from a small assortment of jams were 10 times as likely to buy one of them. This study raises the idea that having more choices can be overwhelming and keep you from making a decision. When we feel confused about what to do, we tend to do nothing.
I'll be the first person to recommend that you never invest in anything that you don't understand. However, too few people understand the fundamental building blocks of financial investments, which are stocks and bonds. My goal is to make you comfortable with them so you don't feel paralyzed choosing mainstream, legitimate investments.
Why Investing Is Mandatory, Not Optional
First, remember why you need to invest in the first place. Tucking your retirement funds into a savings account may seem like a safe option. However, the reality is that not investing and letting your cash sit idle can be much more risky over the long term.
The historical rate of inflation has been about 3%. Therefore, if you earn less than 3%, you will lose money over the long term. To get over that hurdle, and hopefully earn double or triple that rate of return, you’ve got to invest.
Free Resource: Retirement Account Comparison Chart—handy one-page PDF download showing retirement account rules and best places to get them!
There are really only two fundamental ways to make money: be an owner or a loaner.
How to Make Investing Easier and Less Complicated
To make investing really simple, I’m going to strip it down to its core. There are really only 2 fundamental ways to make money: be an owner or a loaner.
- When you own assets that appreciate in value you can sell them for a profit or take out profits in the form of dividends.
- When you loan money you earn interest until the original debt is repaid in full.
No matter how complex a financial instrument is you can boil it down to one of these 2 basic concepts.
What Are Stock Investments?
Let’s dig into the idea of investing by owning assets that appreciate in value or spin off dividends. Here are a few examples:
- starting a business
- becoming an equity partner in someone else’s business
- buying real estate
- building an art collection
- collecting precious coins
These investment options require you to have expertise in running a business or making money in a certain real estate market. Unfortunately, not everyone has this kind of specialized knowledge.
Wouldn’t it be great if you could profit off of someone else’s great ideas and execution without having to do all the work or come up with a ton of money? That’s why the stock market was created!