How to Become a Wise Investor

An investor is someone who commits a certain sum of money to an economic enterprise. In exchange for assuming risk, he or she expects to earn a profit. Warren Buffett succinctly defined investing as “The process of laying out money now to receive more money in the future.”

If a profit isn’t guaranteed, why risk your money at all? It’s because if you invest wisely, the upside is worth the risk.

Regardless of how much you earn an hour, simply trading time for dollars has some serious limitations: you have to work long and hard; sacrifice your precious time, and deal with the stress of constant effort to stay ahead of your expenses.

Investments make it possible to put your hard-earned money to work for you.

Now, instead of you working to make money, your money is making more money. Moreover, if you invest wisely, you’ll earn far more money than was possible through hard work alone.

Choosing an Investment Vehicle

There is no shortage of ways to invest.

You can also choose alternative investments like rare coins, art, or cryptocurrencies, traditional investment vehicles like stocks, bonds, and mutual funds, and managed investment vehicles like mutual funds and ETFs.

In order to illustrate how investment vehicles work, let’s take a closer look at three types of investments: investing in rare coins, stocks, and ETFs.

1. Investing in ETFs.

ETF is short for “exchange-traded fund.” Investments include stocks, bonds, commodities, currencies, bonds, and even precious metals.

They are traded every day on stock exchanges, and like stocks, their prices fluctuate. ETFs are created by large fund managers/brokerage houses, like the Vanguard Group, Fidelity, etc.

They bundle a selection of assets to create a packaged product. For example, energy ETF will contain stocks of different utility and gas companies. You can buy ETF’s through a broker.

If you’re beginning to think that ETFs sound very much like mutual funds, you’re not alone.

In a Forbes article on this topic, Certified Financial Planner Michael Chamberlain explains the critical difference: “ETFs have several similarities to mutual funds. Like a Mutual Fund, an ETF is a pool or basket of investments. However, ETF’s many times have lower expense ratios than a similar mutual fund in that there are no loads and the operating expenses are often lower.”

Related – Should I Invest in an Index Fund or Target Date Funds

2. Investing in the stock market

The stock market consists of markets and exchanges that issue and trade equities. Equity could be stocks, bonds, or other securities.

Basically, you are contributing to a company’s need for capital for a slice of ownership. This market consists of a primary market and a secondary market.

The primary market focuses on trading new issues through the sale of initial public offerings (IPO) while the secondary market includes another subsequent trading, which includes both individual and institutional investors.

In order to do well in the stock market, you should understand how the financial markets work and regularly study stock market investment tips.

3. Investing in Gold or Silver

Gold and silver are possibly the most risk-free investments which consistently producing decent returns since recorded history.

If you enjoy collecting rare objects, then consider investing in paintings, rare wines, gold or silver coins.

One good choice would be gold coins. By law, these coins are only minted from gold that has been mined in the US. Although introduced as late as 1986, it is now the most frequently traded gold bullion coin in the world.

Three important guidelines to keep in mind when investing in rare coins are diversification, research, and authentication.

Diversification.

When you diversify the type of coin and the denomination of coins, you counter market fluctuations and increase your chances of optimizing your returns.

Research.

When you base all your buying decisions on the knowledge you have acquired about a particularly rare coin, you reduce the risk of making a bad investment based on appearance, personal preference, or recommendations from other numismatics.

Authentication.

Unfortunately, not everything is the way it appears to be. Consequently, don’t take anyone’s word for a coin you’re interested in buying.

Make sure that it has been certified by at least the Numismatic Guarantee Corporation (NGC) or the Professional Coin Grading Service (PCGS).

How to Get Started as an Investor

In closing, the best way to become an investor is to prioritize what you plan to do with the money you receive from your salary and from any other income sources. Instead of spending it on a depreciating asset, set some of it aside for investing.

Over time, we can become wise investors if we study as much as we can about investing and make it a practice to continuously extract invaluable financial lessons from our own personal experiences.