Any time you put money aside, you are making an investment in your future. That may be in the form of saving for a future purchase, a future expense, an emergency fund, a new car, a home, retirement, etc.

If you hold that money in cash, it actually loses value because inflation causes the value of your money to go down. On the other hand, if you put that money into something that earns interest, like a high yield savings account, the money is protected from losing it’s value because the interest you earn will increase the balance.

This is a good option for your emergency fund or savings for future purchases, especially if you will be holding the money in the account for more than a year.

But there are other ways to invest your money that have the potential for growth, meaning, your money makes money.

Individual Stocks

Anyone can invest in stocks through a brokerage account or through a retirement account like a 401(k), or an IRA. It’s important to understand your options and even more important to avoid investing in something you don’t understand.

When you invest your money in a business, it has the potential to actually make you money instead of just keeping up with inflation rates. This is potential growth. It also has the potential to lose money, depending on the performance of the business and a handful of other factors.

When you invest in an individual stock, you are investing in that business. Essentially, investing in an individual stock makes you part owner of that business. You will benefit from it’s profits and you will be affected by it’s losses.

Because of this, you should proceed with caution if you choose to invest in an individual company like Apple, Microsoft, Google, or whatever business. No matter how well a company seems to be doing, there is always potential risk involved.

I do not recommend investing in individual stocks. This is essentially gambling. By doing this, you are making a bet that this particular company is going to do well, and if it doesn’t, you risk losing all the money you have invested in it.

It’s highly unlikely your “picks” are going to perform at the standards you expect, and highly likely you will lose. No matter how much faith you have in an individual company, the odds are not in your favor if you put all your money in this basket.

You are likely to want to buy more shares when the company is doing well, which doesn’t make you money. You are just as likely to panic when the company is doing poorly and sell out, which loses money. You have no way to know all of the factors involved in it’s operation and will not effectively be able to predict the future of the business. More than likely, you’ll find yourself in a pickle if you try. Stock picking is a sucker’s game. Avoid it.

Mutual Funds

A mutual fund is generally an actively managed investment tool containing a variety of individual stocks and there are quite a lot of them. Some contain a mix of stocks spread over a certain genre or type of business, some by the country of origin, some by certain market sectors, and a never-ending list of other mixtures.

When you purchase shares in a mutual fund, you are purchasing shares of all the different stocks within that fund and diversifying your investment over multiple companies.

By spreading your investments like this, you lower your risk of losing money because even if one stock goes down, others will likely go up and your funds aren’t tied up all in one place.

Index Funds

Index funds are a type of mutual fund in that the money used to purchase shares of these is spread over stocks in multiple companies, but these are even more diverse because they typically are spread over an entire market.

They are more passively managed and therefore, have much lower expenses. Stocks will be added and removed as various companies within the index fluctuate.

An example is an index fund that follows the S&P 500, which contains stocks in the top 500 companies in the US such as Fidelity’s FXAIX or Vanguard’s VFIAX or VOO.

Another example would be an index fund that follows the stock market as a whole such as Fidelity’s FSKAX or Vanguard’s VTSAX.

In both examples, the money invested will grow based on the performance of the entire market it represents. You still risk losses as the market fluctuates, which it will. But you will not incur a total loss because of some individual company going bankrupt.

Expenses

Regardless of where you choose to invest your money, there will be expenses involved. This is generally called the expense ratio. These expenses cover the overhead cost of managing the funds, including buying, selling, reallocating, trading fees, etc.

Investing has the potential to earn you money but it is not free. This is why it’s important to understand what you are putting your money in and how it is being managed.

Mutual fund management companies vary when it comes to the expense ratio involved. Some are not so costly, but some can be very expensive, and while the funds may grow, the cost will as well, meaning, you might not make as much as you expected.

Let’s look at a scenario. If you invest in a mutual fund that has an annual expense ratio of 0.4%, that doesn’t sound like a lot. It’s not even a whole percent. If you have $1,000 in that fund, your annual expense is $4. Not a big deal. But if you have more money invested, the cost is going to be higher.

If you have that money in a fund that has an expense ratio of 0.02, your expenses will be 20 cents per $1,000. This is much less expensive, and in my opinion, a much better price to pay for my investments.

Some funds have a zero expense ratio, like Fidelity’s FZROX, which means, it doesn’t cost anything as long as you have a Fidelity account.

When you start looking at the numbers based on higher investment amounts, they start to add up. There are a lot of expensive mutual funds out there so when you are considering options, pay attention to the expense ratio. It could cost you more than you expect if you ignore it.

Transaction Fees

Another thing you need to pay attention to when considering investments is whether there is a transaction fee. Many stocks, mutual funds, and even index funds will charge a transaction fee every time you buy or sell it. This can end up costing you a lot of money.

Many times there is no transaction fee if you are buying a mutual fund or index fund managed by the company you have your brokerage account through.

For example, if I have a brokerage account through Fidelity, there is no transaction fee for me to buy or sell a Fidelity managed fund. But if I choose to use my Fidelity account to buy a Vanguard fund, I may be charged $75 every time I make a transaction. It will work the same way if I buy a Fidelity fund through a Vanguard account.

It’s really important to look at the prospectus of a fund before you buy it and pay attention to the fees and expenses that may be involved. If you don’t understand something, ask.

On both Fidelity and Vanguard you can go to a learn section to watch videos, take courses, read articles, or go to the help section to search for answers.

Leave it alone!

One of the most important things you need to know about investing is that it’s for the long haul. You should never invest money in stocks, mutual funds, index funds, or anything else involving the stock market unless you intend to leave it there for at least 5 years. The longer you leave your money there, the longer it has to grow.

An important thing to keep in mind is that the market will go up and down. It will fluctuate. Any money you have in it needs to be able to stay where it is if the market is on a low end because it needs a chance to recover and go back up. This will take time.

This is why the market is not the place for your emergency fund. If you do have an emergency and have to pull money out in the middle of a market drop, you have lost. Keep your emergency fund in an inflation protected high yield savings account.

If you find yourself unable to deal well with seeing the numbers go down with the market on occasion, don’t look. You should be in this for the long haul. You’re not planning on using it right now anyway. Leave it alone.

Vicki Robins, co-author of the book, Your Money or Your Life says, “The only time you care about the price of an investment is the day you buy it, and the day you sell it.” Take this to heart.

Summary

• Don’t try to beat the market by stock picking. You won’t win this game.
• Don’t invest in something you don’t understand. Ask questions. Do your research. Weigh your options.
• Diversify by investing in mutual funds, or better yet, index funds.
• Read the prospectus.
• Know the expense ratios.
• Avoid transaction fees.
• And above all, if you’re going to invest in the stock market at all, do it for the long haul. Leave it alone.