How Much Should You Invest?
"How much should I invest?" is a question frequently asked by savers who want to start making their money work for them. This simple question can actually be quite difficult to answer since there are so many ways to invest and different people have different levels of risk tolerance. Here I will try to answer the question by explaining a few ways to invest and how risky they are, and you can be the judge on what path you should take. (See also: Investments Worth Making With $50 or Less)
Almost Zero-Risk Investments
If you absolutely don't want to lose your money, then you can put it in a high-yield savings or checking account, money market account, certificate of deposit, or U.S. treasury bond. You can put all your money into these investment vehicles and most likely be guaranteed that you won't lose any. The downside is that right now most of these are paying very little interest, so the purchasing power of your money could be eroded by inflation. If you don't have a lot of money and don't want to lose any of it, though, then this is probably the way to go.
If you have more than a few thousand dollars to invest and do not want to do too much work, then it is quite easy to just put your money in a mutual fund. However, there are thousands of mutual funds that put money in a variety of investments, and you need to investigate which is best for you. Personally I have invested in one of Vanguard's Target Retirement funds that invests in a variety of index funds. It is a low-cost and low-maintenance option if you want to invest for the long term without having to do much work. However, if you do take this path and you invest in mutual funds that are mostly stock based, you need to know that it is possible for the funds to vary wildly with the ebbs and flows of the stock market. If you tend to panic when you watch your money go down or if you need the money right away, then this is probably not for you.
Investments With More Risk and Work
If you are into research and do not mind watching your investments often, then you can try your hand at building your own stock portfolio by buying individual stocks or ETFs. I have not done this before, but I do have friends and family who like to do technical analysis on the stock market and trade stocks for the short term. They usually park a lot of money in cash and then only place a small portion of their capital on each stock pick or "bet." Many times the stock or ETF is sold within hours or days of their purchase. Some people also trade options, but that's not for beginners. If you want to try your hand at picking stocks, then I would suggest not putting all your money in right away, because it is possible to lose a large chunk in the matter of days. Some people call this speculation, not investing.
Investments With Lots of Risk, Work, and Possible Reward
When you know some investments well, it is possible to invest without putting up any of your own money and instead borrow the capital you need. For example, some real estate investors will borrow 100% of the money they need to buy houses and then either quickly flip the house or rent the house out and then refinance. Other investors borrow the capital for a business and then pay the loan back over years with the business's cash flow. These methods of investing require a lot more work, and if you don't know what you are doing, you are almost guaranteed to lose money. The upside is that if you make money, you are doing it with other people's funds and you can repeat the process and make more money. If you want to go down this path, you would need to do a lot of research and learn about the business you are targeting. You also need to invest quite a bit of your own time.
I have left out a lot of other investing possibilities in this brief article, but the truth is that how much of your time and money you should invest to make more money is completely up to you. That may not be the clear cut answer you were expecting, but what is clear is that if you have saved money, you should probably invest as much of your capital as you can so that eventually you will have an income stream that lets you be financially independent.
How much of your money and time do you invest to make more money?