Investing Guide: How to Invest In 2023

Last updated sept 9, 2021 | by Kirk Anthony | 10 Min read

Most people want to be in a position where they are constantly making money. People go into employment to earn an income. If there was a way people could make money without having to work, people would not be seeking employment. Naturally, people seek leisure more than work. However, to enjoy leisure, you have to make enough money to support your leisure activities. While earnings from your job can sustain your lifestyle, putting money into investments can have such a great impact on your life. It will help you grow your wealth many times more. However, many people do not know how to go about their investments. An investing guide is therefore necessary.

Let’s begin

What is Investing?

Investments involve distributing your resources to different assets that earn you returns. There is a wide range of avenues you can use for investing. It could be land, art, cryptocurrencies, real estate, bonds, or stocks. You can invest in anything you expect to go up in value. Wherever you put your money, it should have the potential to earn you income or increase in value, offering you an opportunity to reap from the increased value in the future.

Different forms of investments offer different levels of risk. They also attract different people. Some investment vehicles such as stocks, bonds, and real estate are more popular than others due to their characteristics and being the most secure. You must consider several factors when choosing where to invest. A key factor in your choice is your needs and your goals. That will give direction to your investment choices. Different investment formulas work for different people in different ways.

Some people don’t invest because they think investing is too complex. While it can get complex, it’s important to keep it simple. Anyone has the ability to invest. In reality the type of assets you own should match what you personally need to accomplish. Design your portfolio to meet your specific goals and needs.

Keep reading to find out how to invest in your portfolio

The need to Invest

Opportunities to invest are abundant. However, most people pass such opportunities because they think investing is too complicated and fear losing their money. Knowing when and where to start is a key component of your investment journey. Before you consider starting to invest, you need to consider a few reasons why you should invest.

Most people seek and stay in active employment for a stable flow of income. However, many would want to make more money. It is rare for anyone to wish to remain on the same income level throughout their life. People are therefore constantly seeking opportunities to increase their wealth. Putting your money in different investment vehicles offers an avenue through which you can increase your income without necessarily leaving your job.

Before you set off, you need to learn a few things that will help you navigate the world of investments so that you can achieve maximum returns. The most important thing is understanding yourself. You need to have a clear understanding of the type of investor you are. That will determine how you invest your money. The investing style is dependent on your risk profile and the attitudes you hold towards investments.

One can adopt one of three main investment styles. You can choose the Do-It-Yourself (DIY) option where you carry out all the investment tasks on your own or you can adopt a passive investment approach. Under passive investment, you put your money into funds that do the investment for you. You can use index funds or exchange-traded funds (ETFs).

Once you know what style of investment you wish to adopt, the next step would be to select the asset classes that fit your needs and risk tolerance. This is an important step as a wrong choice may yield results that you may not have wanted. The key aspect of this step is to look at the returns. However, you must keep in mind that whilst you desire high returns, the returns depend on the risk level. If an asset class offers high returns, then it is likely to have a similarly high risk.

It is common for people to gravitate towards high-return asset classes for their investment. However, the best move would be to develop a diversified portfolio. You need to invest in a wide range of asset classes to spread your risk. That shields you from massive loss if a given class of assets collapses.

If DIY is your investment style of choice, then you need to understand how returns work. You need to pay attention to the interest rates offered for each investment vehicle. To analyze the investment options, you need to know how to calculate compound interest. By doing this it will show you how your investment grows in each asset class. You can use an online compound interest calculator to help you assess your options. The calculator helps you see how your investment will grow in a given number of years based on a given interest rate.

Money looses value over time. Inflation is a key component of how money looses value as time passes. It reduces the purchasing power of money such that a given amount will be able to purchase fewer goods in the future than it can today. Thus, interest rates help compensate investors for this lost value. Compound interest takes into account the annual inflation to help investors avoid losing value in their money. Unlike money staying idle in your bank account, investments allow you to pass off the effects of inflation. It ensures your money maintains its worth by growing it over time.

Everyone has dreams of things they want to enjoy in life. However, the hassles of life prevent us from living out our dreams. Sometimes we spend so much time working to earn a living that we forget to live our lives. Thus, it becomes necessary to create an extra source of income to facilitate our dreams. Given the nature of most jobs, the best option for an extra source of income would be generating passive income. This is income from a source in which you do not need to put in active physical effort. Investments are a great way to earn passive income. If you build up a large enough investment portfolio, you can live off of the interest produced alone. Check out the 4% rule.

When you should start

The rate at which your wealth grows is dependent on several factors. However, time is very crucial. The amount of time you allow your money to grow determines how much you will have in the end. Thus, it is important to consider how time affects investments.

While there is no right time to start your investment, it is recommended that you start early. The earlier you start, the more time you allow your money to grow. Your money will be able to accumulate over the years to enhance your financial position. You can also take advantage of compound interest reinvestment to make your investments grow at a faster rate. Here, instead of withdrawing the interest you earn, you reinvest it back so that it earns you more money.

Everyone is in different financial situations. Thus, their investment habits will differ. Some will start saving and putting their money to work straight out of school. However, others will have student loans to deal with. Their investment priorities will be fighting for resources with the debt repayments. A person depends on his/her income to create and build wealth. However, that becomes a big challenge if you are furnishing your loan repayments from your income. It is akin to trying to fill a leaking bucket. A potential investor needs to decide on how to go about the loan repayment while also putting some money into interest-earning ventures.

The choice to Invest or Pay Off Debt

Not everyone should try to invest. People in dire financial positions cannot put money into investments as that would have a huge impact on their day-to-day life. For instance, if your cash flow were low or negative, then it would be a bad idea to invest. You will have to adjust your budget and spending habits to have some money to invest. That requires great sacrifice. Always prioritize your debts as they can inhibit your growth in the future.

There will always be a disparity between the interest on your loans and the returns from your investments. Mostly, interest on debt is usually high. Thus, it would be wise to first focus on repaying the debt so that you are free from the liability before you can focus your money on an investment. If you must invest, find a healthy balance between your investment and debt repayment. That way, you can take advantage of the compound interest from investments.

The choice between debt repayment and investment depends on factors such as:

Interest rates on loans
Amount of income
Debt amount
The expected rate of return on investments
Loan period
Emergency fund amount

If your debts have a high-interest rate, then your focus should be on servicing those debts. That will save you a substantial amount that would go towards interest. Always keep in mind that defaulting on a loan would have unpleasant consequences that may set you back financially. Thus, paying off the debts relieves you of the risk that comes with defaulting. Other low-interest debts such as student loans may not be so demanding and you can balance them with investment.

Emergency Funds

A very important factor to a person’s wealth creation is an emergency funds. Life can be a roller-coaster at times. The unpredictability of life poses challenges to growth. Events can occur that set you back financially. You may have to take loans to cover emergencies and the loans set a burden on you. You can avoid the anguish of unforeseen adverse events by setting up an emergency fund. It will cushion you against events with an adverse financial impact. Thus, you will eliminate the need for loans, giving you a stronger position for investments.

With an emergency fund, you can cover your recurring expenses for about six months. That can be sufficient to keep you afloat when you encounter financial setbacks. Although inflation eats into the value of your money, an emergency fund cushions you against stormy financial times. It will not earn your interest, but it will minimize the impact of a financial crisis in your life.

How Much you need to invest

At the core of knowing how to invest, is knowing how much to invest. As already established, different people have different realities. One person’s financial reality will result in a very different perspective from that of the next person. Therefore, in deciding how much to invest, you need to consider your situation and not try to fit blindly into a given investment idea.

Most financial issues require proper budgeting. Having an elaborate financial plan will help you know your course of action. It will guide your spending as well as how you invest your money. You need to establish your recurring expenses, the debts you need to service, and the interest rates for the loans.

Although there are recommendations on the percentage of your income that should go into savings and investments, that will majorly depend on the level of income and the expenses and debts you are servicing. Generally, you should invest 15%-20% of your income. However, your recurring expenses and debt repayments can be such that you end up with less than 15% of your income remaining. That does not mean that you should not invest. You should find a way to work with what you have.

Having a budget will go a long way in instilling discipline into your spending habits. Rather than save and invest what remains after your expenses, budgeting allows you to set aside a constant percentage of your income to invest. The amount will not depend on your expenses, as that would curtail your efforts to invest. Instead, it becomes part of your budget where you allocate a portion of your income every month to investments.

Where you can invest

Setting aside money to invest does not translate into returns. You need to put the money into an investment tool or vehicle that will help you grow the money over time. Before you settle on where to invest, you need to come up with an investment strategy. You should have short-term goals and long-term goals. The goals will guide your strategies. You should never put all your investments in one account.

Short Term Investments (5 Years or Less)

Based on your financial projections, you may need money in the next 5 years. You may need the money to achieve a certain goal such as acquiring a car or a house. Although a savings account may seem attractive, it generates very low interest. You will end up losing money due to inflation. You need to put your money in high-interest investment vehicles such as online high-interest savings accounts and certificate of deposit accounts.

The high-interest investment accounts will give you a higher interest rate than a savings account. You will be able to grow your funds and achieve your short term goals easily.

Long Term Investments (Beyond 5 Years)

If you do not have projects that will need money in less than five years, then long-term investments should be your focus. Often, these offer a good retirement plan. A big advantage of long-term investments is that your money generates returns, which also generate returns through compounding over a long period. Thus, there is substantial growth in wealth if you keep your money invested for a long time.

There are two main types of long-term investment plans. You can have an employer retirement account such as 401(k), 403(b), and 457(b). These accounts allow your employer to deposit a percentage of your salary every month. You also deposit into them and allow them to grow. You can also invest in individual retirement accounts (IRA) such as the traditional IRA, Roth IRA, SEP-IRA, and the Solo 401(k).

While you will be taxed upon withdrawal of funds from a traditional IRA, money in the Roth IRA does not attract taxes. You can however deduct payments to traditional IRA from your taxes. Roth IRA serves young investors better than the traditional IRA does.

The stock market offers one of the best options to grow your money over many years. However, you need to create a diversified portfolio to shield yourself from market shocks. Index funds such as Voo can help you achieve a balanced, diversified portfolio. You can also use a discount broker or your Roth IRA to develop your investment portfolio. 401k is also a good avenue to use for investment in the stock market. However, the investment options in a Roth IRA are few.

If stocks are your thing, then you need to understand the dynamics of the stock market. On average, the stock market offers a return of 8-10%. A bull market occurs when there is a 20% rise in market prices. A bear market on the other hand refers to a 20% fall of market prices from the market peak. A 10% fall from the peak results in a correction. On average, there has been a correction once a year since 1900. While the market makes money three out of four years, it records a drop once in four years.

As an investor, the worst thing is not being in the market. Every fall passes and you can reap handsomely after a storm.

How to Make Money

Investments need attention. Before you can start reaping your rewards, you must put in the work. Since you do not know the outcomes of the market, you shouldn’t put all your investment in one stock. You have to find a way to bet on the market rather than the single stocks, which helps spread your risk.

You can achieve an effective investment strategy that invests in the entire market by using index funds. An index fund provides you with a collection of stocks that replicate the characteristics of a given benchmark such as the S&P 500. By investing in an index fund such as Vanguard S&P 500 ETF (VOO) you will be investing in over 500 stocks with one investment.

There are also mutual funds that you will hear about. Unlike an index fund, a mutual fund has active managers, resulting in higher fees than index funds. Mutual funds use the S&P 500 as the benchmark. We highly recommend staying away from mutual funds due to their high fees and likelihood of failing to beat the market.

It is advisable to use a low-fee S&P 500 index fund as it would give you a good performance and diversification in the market. These options offer more efficient methods of choosing stock rather than picking individual stocks on your own.

How to make money

You can make money on the stock market a couple of different ways. The first way that you can make money is buying and selling appreciated assets. You do this by buying an asset expecting that it goes up in value and then sell it for more than you bought it for. This can be risky as prices can be unpredictable and unstable. It’s important to do your research and invest in something you truly understand.

Another way that you can make money with the stock market is through dividends. Dividends provide investors with passive income. Investors get paid when companies decide to share a portion of their earnings with the shareholders in the form of dividends. Dividends are typically paid quarterly, but can also be paid annually, or semiannually.

Some great dividend paying companies to check out are Coca-Cola (KO), Apple (AAPL), and PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD)

Once you have a large enough investment portfolio you can collect dividends or withdraw a percentage (typically 4%) of that money as income and live off of it. For example let’s say you have a 2 million dollar portfolio, and withdraw/sell 4% of your assets. That would equal to $80,000 for you to live off of! Keep in mind that the average growth rate of the stock market is 9% This is incredibly inspiring!

Core Principles on how to invest in 2022

• Diversify and Allocate

What’s the difference? Asset allocation refers to spreading your money across different asset classes. For example you wouldn’t want to put all of your money just in stocks, you would want to spread your money to stocks, bonds, commodities, treasuries, etc. On the other hand, diversification is about spreading your money within each asset class. For instance, you want to have many different types of stocks in your portfolio, not all of the same stock. This applies for each asset class you are invested in. The goal is to have about 10-15 unconnected assets that don’t move in tandem. This is a key component to long-term financial success.

• Don’t Lose money

Regardless of your investment of choice, always remember to do everything to avoid losing money. Warren Buffett says it best “Rule No. 1: Never lose money. Rule No. 2: Never forget rule number 1. The key to not losing money is asset allocation.

• Have an Asymmetric Risk/Return

Although it’s not always possible, risk 1 dollar to make 5. You should try to aim for that. Always aim to make more money from what you invest.

• Have a Cushion

Before you invest you need to have a fully funded emergency fund. This will be different for everyone but typically we recommend 3-6 months worth of income. After your emergency fund, invest in bonds for cushion. If the stock market crashes you can sell some income producing investments to buy low priced stocks.

• Tax Efficiency

You can be tax efficient by investing within your 401k, Roth, or traditional IRAs. By simply investing in these and being smart with the holding period you could save up to 30% on taxes. Do not start with focusing on taxes but always look for opportunities to invest in tax-deferred ways.

• Portfolio Rebalancing

You need to rebalance your investment portfolio about once or twice a year. You rebalance by selling assets that are doing well and buy assets that are down. Another option would be to buy more stocks that are down without having to sell the stock you have. By rebalancing you are ensuring that you maintain your desired portfolio balance.

• Ignore the Noise

There will always be a lot of advice coming from different corners. You want to ignore the noise and focus on your set plan. Do not jump into the latest trends.

• Always Consider the Fees

Most people do not pay attention to the fees that they pay. You must pay keen attention to the fees you pay as they could eat up a big portion of your returns. Actively managed funds especially have high fees that you should stay away from.

• The Stock Market is a Pendulum

As Warren Buffett says ‘’be greedy when others are fearful and fearful when others are greedy’’

• Dollar Cost Average

Set up recurring investments into your portfolios. This proven strategy takes the human element out of investing and allows you to invest regardless of the market condition.

Getting Started

Step 1. Open a 401k if your employer matches your contributions. This is free money! We recommend, if possible, to maximize your employers match. This is also a great way to invest because it is tax deferred.

If you have the option to, I recommend investing in a Roth 401k. Especially if you believe taxes will go up for you in the future or if you believe you will be in a higher tax bracket. With a Roth 401k you pay taxes now instead of when you withdraw.

With a Roth 401(k) you know exactly how much you will have when you go to withdraw your money. As with a traditional 401(k) you don’t know how much of your money will go to taxes when you withdraw. If you don’t have the option for a Roth 401k, it’s ok a traditional 401k is great too.

Regardless of which 401k you go with, it’s very important to look over the fees. If your plan has excessive fees and has actively managed mutual funds, do not invest in it.

Now, If you have a good plan where your employer matches your contributions, has minimum fees, and good investment choices, max out the amount your employer matches up to.

Step 2. Invest in a Roth IRA After investing up to your employer’s match, start investing in a Roth Individual retirement account (IRA). A Roth IRA is a tax-advantaged retirement investment vehicle for individuals. If you are under 50 you can invest up to $6,000 per year, or if you are over 50 it is $7,000 per year. A great place to open up an IRA is Vanguard or Betterment.

If your self employed Consider a SEP IRA

Step 3. Invest in an Online Broker. After you have invested in your 401k and IRA, invest your extra money into an online Broker such as Vanguard, Fidelity, M1 Finance, or Robin Hood. It is recommended to do this last because it is not tax deferred and you will have to pay tax on financial gain.

Setting up Automatic Transfers

Investment accounts allow you to set up automatic monthly transfers. You can set your transfer to be a day or two after you receive payment. That way, the transfer occurs before you realize you ever had the money. It’s great for helping you avoid spending money on other things. Also, It is very important to consider your debt before investing.

When setting up your contributions, follow this order:

High interest savings account. This includes emergency funds, goal-saving, and free-spending money
Max out employer match in your 401(k) or 403(b) if working for a nonprofit
Invest within your Roth IRA. $6,000 max per year
Go back and max out your total 401(k) $19,500 max per year
Put extra money into your online brokerage account.

Choosing your Investments

Once you have money streaming into your investment accounts, you need to buy investments. Avoid leaving money idle in your accounts. Many people inadvertently leave money idle in the account and end up losing out on returns. Take time to choose the investments you want and then let them generate income for you.

A great choice to invest in would be index funds. Some of the index funds to consider:

Growth index funds such as VOO and SPHD that track the S&P 500
Total US stock market index fund such as VTI
Bond index fund such as BND and BLV
REITs such as VNQ
Total International stock such as VXUS

*Disclaimer: We are not financial advisors. If you are to make the best financial decision, please carry out your own research according to your needs.

Sample Investment Portfolios

David Swensen’s Portfolio:

20% Domestic Stock

20% International Stock

20% REITS (Real Estate Investment Trusts)

10% Emerging Stock Markets

15% Long-Term US Treasuries

15% TIPS (Treasury Inflation-Protected Securities)

Ray Dalio’s “All Seasons” portfolio:

40% in long-term bonds (20-25 year treasuries)

30% in stocks (the S&P 500 and other indexes for further diversification)

15% in intermediate-term treasuries (7-10 year treasuries)

7.5% in gold

7.5% in commodities

Note:

All index funds
The percentage of risk you take depends on factors such as your risk tolerance, your liquidity, and your stage of life.
The younger you are, the more you should invest in stocks.
The older you are, the more you should invest in bonds.

Sit back and enjoy life

Imagine how your life would change if you woke up everyday knowing that your money is automatically going exactly where it needs to. You are automatically: saving money, investing in all the right places without thinking about it, paying your bills on time, and you even set aside income to spend on what you love.

This is not just a dream, by following the steps in this guide it could easily become your reality!

Once you have everything all set up, it’s time to relax and go do more of what you love.

Monitoring your money and investments

Although investing can be passive, you cannot ignore it completely. You need to monitor the performance of your investments in order to make critical decisions such as rebalancing your portfolio from time to time. This helps to maintain a healthy balance in your investment portfolio.

My favorite way to track my finances is by using a free investment tracker called Personal Capital.

With Personal Capital you can analyze your investments, watch your net worth, track spending, set savings goals, and much more.

Investing can be challenging at times. This is especially true if you have little to no knowledge or experience. However, you should not run from it. Do not postpone your investment for the future. Remember, the earlier you start, the more your wealth will be able to grow.

If you follow the advice we gave you above you will be well on your way to building your wealth and one day retiring early