How to Invest

In a forum I hang out in, I recently received a private message from another user, asking about investing. He had $100/month to spare, and wanted to make good use of it. My advice to him follows:

Hey, John:

Sorry about the delay; I haven’t logged into the forums much this week. I’m not a certified financial advisor and I don’t know the details of your situation, so just be aware that what follows is generic rather than specific advice, and you should ignore anything that doesn’t sound like it applies to you.

Stock Market

How best to invest depends a lot on what your goals are for yourself and for your money. When most people think of investing, they think of the stock market. There are 2 smart ways (and a whole bunch of stupid ways) to invest there:

1) You don’t want to have to mess with it. If you invest $100/month at (an average of)10% interest for 30 years, you’ll have invested $36,000 but you’ll have an account worth $226,000. If you’re just looking for something to keep you off the street in your old age, this is a good method. You set up an account to automatically withdraw $100 from your checking account and invest it some index fund — it really doesn’t matter which — and forget about it.

2)You think business and finance is awesome, you love analyzing financial statements, and you have several hours per week to spend on analysis. In that case, you may enjoy investing in individual stocks. The stock market is full of stupid and emotional people, and there are plenty of stocks out there that are massively over- or under-priced. But you have to be willing to read — really read — a document 1/4″ thick, look at all the numbers, compare them to the numbers from last year, figure out how the company’s doing, keep up on news and trends that might affect this company, etc…. for every company you want to invest in. It can be cool, but it can also be a full-time job that takes training. If it interests you, I’d recommend investing the first several months’ worth of money in books on accounting and business and stock-market terminology. You can call any company and get their prospectus — that’s the 1/4″ document with lots of small print — for free, so look it over and practice your business analysis.

Anything between these two extremes, I’m going to say is stupid. I’m willing to entertain suggestions on what someone thinks isn’t stupid, but unless and until I see it, I feel pretty comfortable calling them all stupid. If you aren’t willing to put in your hours of analysis, it’s dangerous and risky to buy stocks & bonds; you’re putting your money into something with no safeguards, with no idea what’s actually going on. If you’re going to go in mutual funds anyway, then any time spent analysing is a waste: mutual funds all go up and down together, in sync with the market, and professionally-managed mutual funds often under-perform monkey-with-a-dartboard-manged mutual funds. Pick one with low fees and forget about it.

Real Estate Investing

Another place people often think of is real estate. Real estate investing can also be very cool, and your analysis doesn’t necessarily have to involve long columns of tiny numbers. There are lots of ways to make money in real estate: buy-rent-hold, fix-and-flip, short sales, lease-option, etc. Short sales and lease option are making good money in this market; if you have the credit to afford a property right now, you can get good deals for buy-rent-hold. Again, if this interests you, I would invest the first several months’ worth of money in education, and I would see if I could find a current real estate investor to help me out.

Invest In Yourself

Next possibility: invest in your own brand. The internet has made it totally possible for people to make a living doing things they (at least kinda) enjoy. You might want to start your own business, or make crafts and sell them online, or run a website on a topic that interests you, or write a blog, or make videos, or whatever. If you have something that you’ve been thinking of doing, use your money to buy business cards or a domain name or materials for your business. (If I had $100/month to invest, I would use it to try assorted advertising campaigns for my partner’s business, to figure out which are the most effective.)

If you don’t have an idea of what you’d like to do, but the build-my-monetization-potential sounds good, then I’d put the money into something low-risk/low-yield, like a short-term CD, a government I-bond, or just an interest-bearing Paypal account. My extra monthly money goes into my Paypal account, and I just save it up for use when I want to develop a new income stream; that’s what made it possible for me to start up my website when Steve Pavlina pointed out SBI as a good method. So save it up while you study possible monetization plans and make decisions about what you want to do.

Another possibility in the investing-in-yourself line is to look at what you want to do. Would you like to get into management in your company, but don’t have the necessary degrees? Go back to school. Would you like another career entirely, but don’t have the necessary skills? Look into workshops or training-style classes you can take. Do you have a hobby that you think you could make a business? Read some books on starting a small business.

Investing Summary

So, I realize that it’s probably not the “Go here, do this” answer you were looking for, but the long and the short of it is that step 1 has to be deciding what you want. I would put the money in a savings account until you know what your goal is, and then you’ll have it ready and waiting for you.