Investing is arguably the best way to build long-term wealth. When you invest your money, you make it work for you. Your wealth increases while you sleep—literally!
Of course, it’s not quite as easy as falling asleep, and the world of investing can be a confusing place. There’s a lot to learn, and it can feel overwhelming to newcomers.
In this Q&A guide, I will answer some of the most common questions about investing fundamentals and share some of my own insights to help you feel more comfortable investing in your and your family’s futures.
I’m Jordan Wexler, CEO and co-founder of EarlyBird. EarlyBird is an investing platform that makes it simple for adults to set up custodial investment accounts for children and invest in stocks, ETFs, bonds, and more. EarlyBird makes it simple to invest in the children you love—with no investing experience required!
How Does Investing Work?
Investing is all about putting your money to work so that it can earn more money over time.
Put simply, it’s the concept of buying something that you believe will increase in value over time. You could invest in stocks (companies), real estate, or even collectibles.
Let’s look at an example:
If you earn 10% average returns (which is the long-term average in the U.S. stock market), $1 invested today might be worth:
- $1.61 in 5 years
- $2.59 in 10 years
- $6.73 in 20 years
- $17.45 in 30 years
On the other hand, if you kept that $1 in a savings account, it would earn very little. Even after 30 years, it may only be worth $2 (or even less)—simply because regular savings and checking accounts don’t earn very much in interest.
And to make matters worse, inflation means the actual buying power of that dollar decreases over time.
We’ve all heard the stories from our parents and grandparents about how much a dollar could buy back in their day (one hundred pieces of licorice!). And someday, we’ll be the ones spouting stories like that to our kids and grandkids, as the value of a buck continues to decrease as time goes on.
By investing, you can help your money grow over time so that you’re able to beat inflation and build real wealth for you and for future generations (lots and lots of pieces of licorice…or the money needed to buy a home, start a business, go to college…you get the idea).
What Should I Invest In?
There are many different types of investments. The most popular approach is investing in the stock market—which is like buying slices of companies that you believe are going to grow.
For instance, if you invest in Apple, you are placing a bet that Apple as a company will continue to grow. If all goes according to plan, your slice will be worth more money down the road.
But investing in specific companies can be risky—and you have to spend time selecting which companies you want to invest in.
An alternative is buying into index funds or mutual funds.
Investing in things called index funds, exchange-traded funds (ETFs), or mutual funds, helps to spread out your bets. These funds are baskets of investments that include many different companies.
For example, you could buy an S&P 500 index fund. These funds invest in the 500 largest companies in the United States. By buying this index fund, you will technically own very small slices of 500 different U.S. companies.
That way, if one company fails, you still own portions of 499 other companies that will hopefully be growing enough to offset any losses.
You can also invest in things like real estate, which has historically been a great investment, as property values tend to go up over time. But, keep in mind there are no guarantees that this will continue. Every investment carries some risk.
You can also look at alternative assets, like cryptocurrency, art, collectibles, and more.
Investing can be as complex as you want it to be. You could invest in dozens of different assets, or you could keep things simple and just buy a single index fund.
You want to think about all the investments you have access to. Then, narrow it down to what you believe in and find ways to invest in those things. Remember, investing doesn’t need to be complicated!
What Is Diversification, and Why Is It Important?
Diversification is the most important concept when it comes to investing. This is the idea that you don’t want to put all your eggs in one basket—because if that basket breaks, you could lose everything.
For example, if you invest all your money in a tech company, and that company ends up going bankrupt, you could lose 100% of your investment.
But if you invest in an index fund with 500+ holdings, even if one of those companies goes bankrupt, it would have a much smaller effect on your overall portfolio and wealth.
I strongly recommend (as do most financial advisors) that you build a portfolio with different investments, as nothing is ever a sure thing.
For example, you could have 50% of your funds in the stock market, 25% in real estate, and 25% in other assets.
How Much Money Should I Have To Start Investing?
Some brokerages may require a minimum amount, like $1,000, to open an account. But, not all companies have this requirement, so make sure you shop around.
You can truly get started with $5. It’s all about getting started now—like, today.
The most powerful thing about investing is the idea of compounding interest over time.
Year over year, you’ll make some money on whatever money you invested. And as long as you reinvest those earnings, you’ll make money on that money as well, and that money will continue to compound year after year.
The effects of compounding interest can truly change your life.
Investing is much more accessible than it used to be. Modern platforms let you get started with as little as $5, $10, or $100. The key point is to start as soon as possible—whether you’re saving for your own future or your children’s.
If you invest $5,000 before your child is two years old in a general S&P 500 index fund, those funds will grow into over $1 million dollars by the time your child turns 65, based on historical growth. So, you can literally create their retirement fund with $5,000 invested now, without any future deposits.
While I’m obviously biased, I truly believe that EarlyBird is the best way to invest on behalf of any young children in your life. It’s quick, simple to navigate, and offers some unique features, like video memories, that other services don’t provide.
Learn more about how EarlyBird works here.
Why Is Long-Term Investing Usually Recommended?
Long-term investing is recommended because of the power of compounding interest.
Essentially, investing profits can “snowball” over time. A single investment made today won’t necessarily grow much in the next year—but in 10 or 20 years, that money can grow exponentially. Look at our example above—$5,000 can easily turn into $1 million if you can wait long enough.
Plus, long-term investing helps reduce the risks associated with short-term swings in the stock market.
If you invest money that you need in a few months, you could risk losing money—because stocks tend to go up and down in the short term. But over the long term, the stock market tends to rise.
How Do I Get Started With Investing?
If you want to start investing in the stock market, there are two main ways: a managed portfolio and a self-managed portfolio.
If you choose the managed portfolio, there are a lot of great options out there—Betterment, Wealthfront, and others. You can deposit a sum of money, and they invest it for you. This is a more hands-off approach, and can be great for someone who doesn’t know a lot about the market or doesn’t want to spend time managing their own investments, but it comes with higher fees.
A self-managed portfolio would be where you want to pick and choose what you buy. With that route, I’d highly recommend looking into Robinhood to start buying into specific companies or ETFs that you want.
If you are looking to start investing for your child, we obviously recommend EarlyBird. Your child has the highest potential to truly build generational wealth because of their long time horizon. And EarlyBird makes it simple for loved ones to set up custodial investment accounts for children.
Any Final Tips or Advice?
Long-term success in investing involves diversification and consistency above all else.
A concept called dollar-cost averaging is important to keep in mind—it’s essentially the idea of consistently investing small amounts every week or month.
Dollar-cost averaging is the idea that you can’t time any great investment. It’s pretty much impossible to try to predict the future. If you can’t time the market, the most powerful way to invest is to set up a consistent weekly or monthly investment. Continue to do that for as long as possible.
It’s important to think about your overall budget and consider how much you can put away to invest. It could be $10, or $100, or $500 per month. Whatever the amount, dollar-cost averaging is going to provide the best chance to really build wealth.
Finally, make a financial plan and an investing plan—and do your best to stick to it. And remember, investing is a long-term journey. Stay the course, don’t panic on the downswings, and you will be well-rewarded in due time!
By learning the fundamentals of investing, you can set yourself up for success in the long run.
By investing for the long term, building a diversified portfolio, and making investments on a regular basis, you can optimize your investment strategy without needing to be a financial expert. In short: start today, and make it a habit.
Want to teach the children in your life about investing? Our guide to the stock market for children can help.
And to start building long-term wealth for the little ones in your life, check out EarlyBird. EarlyBird makes it simple for adults to set up custodial investment accounts for children and invest in diversified portfolios of stocks, bonds, and more—no investment experience required.
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.