Investing money: A comprehensive guide
Imagine a life where every single euro you earn takes you one step further towards financial security and abundance. It’s not just a fantasy: You can invest your money in smart ways to help it multiply over time. Keep reading to learn more about investing, financial independence, and how to make the most of your hard-earned money.
Benefits of investing money
Building wealth
Investing is a chance for your money to grow over time instead of simply sitting in your bank account.
Generating income
Certain investments, such as dividend-paying stocks, bonds, or rental properties, can become a source of regular income, giving you more financial stability and freedom.
Achieving financial goals
Whether it's saving for retirement, buying a home, paying for school, or building a nest egg, investing is one strategy for reaching your financial goals.
Protecting against inflation
Investing in stocks, real estate, or commodities can help hedge against inflation and preserve your money’s
How to start investing money
Set financial goals
Define what you want to achieve by investing, such as saving for retirement, buying a home, or paying for your education.
Set a budget
Look at your current financial situation and figure out how much money you can comfortably put towards investments.
Choose an investment strategy
Determine your investment strategy based on your financial goals, risk tolerance, and time horizon.
Open a brokerage account
Choose a brokerage firm or investment platform that fits your needs and preferences.
Pick the right investment strategy for you
Investment strategies vary depending on individual goals, risk tolerance, and financial circumstances. Clear goals are important — they’ll help guide your investment decisions and determine your risk tolerance. Create a budget that accounts for expenses, savings, and investments so that you can invest regularly without compromising your financial stability. Think about whether you prefer a hands-on approach, such as active stock trading, or a more passive approach, such as investing in index funds or ETFs. Here are some common investing strategies to consider:
Long-term investing
This strategy (also called position trading) involves buying and holding investments for an extended period, typically five years or more. Long-term investors focus on fundamentals and aim to capitalize on the power of compounding. It's suitable for investors with a low to moderate risk tolerance who are saving for retirement, education, or other long-term goals.Diversification
Diversification involves spreading investments across different asset classes, sectors, and geographical regions to reduce risk. By diversifying, investors can minimize the impact of poor performance in any single investment. This strategy is suitable for investors of all risk profiles and can help protect against market volatility. It can also be paired with many other investing strategies.Index fund investing
Index fund investing involves buying into funds that track a specific market index, such as the S&P 500. These funds offer broad diversification and low fees, so they’re good for passive investors who are hoping for consistent returns over time. Index fund investing is especially popular with investors who have a long-term investment horizon and a low tolerance for risk.Value investing
Value investing involves identifying undervalued stocks — stocks that are trading below their intrinsic value. Value investors look for companies with strong fundamentals, stable earnings, and a margin of safety. It can be a good fit for patient investors who are willing to do their research and wait for the market to recognize the stock's true worth.Dividend investing
Dividend investing means buying stocks that pay regular dividends to shareholders. Dividend investors are usually looking for stable income streams and companies with a history of dividend growth. This strategy is suitable for income-focused investors seeking passive income and long-term capital appreciation.Growth investing
Growth investing involves buying stock in companies with high growth potential, often in emerging industries or sectors. Growth investors prioritize revenue and earnings growth over current profitability and dividends. This strategy is suitable for investors who have a high tolerance for risk, want to maximize their potential returns, and think they can spot a winner.Active vs. passive investing
Active investing involves selecting and managing individual investments with the goal of outperforming the market or a specific benchmark. In contrast, passive investing involves investing in index funds or exchange-traded funds (ETFs) that track a market index, such as the S&P 500, with minimal buying and selling.Dollar-cost averaging
Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of market conditions. This strategy helps investors mitigate the impact of market volatility and take advantage of dollar-cost averaging over time. It's suitable for investors of all risk profiles who prefer a systematic approach to investing. Ultimately, the best investment strategy depends on you: your individual financial goals, risk tolerance, time horizon, and investment knowledge.
Individual financial goals
When setting financial goals, be specific and realistic about what you want to achieve, based on your income and expenses.
Risk tolerance
Investors with a higher risk tolerance are more comfortable with volatile investments that have the potential for bigger returns, while people with a lower risk tolerance may prefer safer, more conservative investments.
Time horizon
Time horizon refers to how long an investor expects to hold their investments before needing to access their money.
Investment knowledge
Understanding the different types of investments, strategies, and risk management techniques can help you create a robust investment plan that’s tailored to your needs.
The different types of investments
Investments come in all shapes and sizes, each with unique characteristics, risk profiles, and potential returns. From the fast-paced world of trading stocks and bonds to real estate and the glint of commodities like gold, there’s a whole range of investment vehicles that cater to various preferences and objectives. Understanding the types of investments out there empowers you to invest in a way that’s right for you.
For beginners
Index funds/ETFs: These funds track a market index like the S&P 500 and offer diversification at a relatively low cost. Dollar-cost averaging: Investors put in a fixed amount of money at regular intervals, regardless of market conditions. This can reduce the impact of market volatility.For conservative investors
Bonds: Government or high-quality corporate bonds can provide steady, predictable income and are usually considered lower risk than stocks. Dividend-paying stocks: Some companies pay regular dividends to their shareholders, which means income for investors and the potential for capital appreciation. High-yield savings accounts: A savings account at a reputable bank can be a safe place to park money and earn interest. Certificates of deposit (CDs): CDs offer fixed returns for a specified term, with minimal risk.For moderate investors:
Balanced funds: These funds invest in a mix of stocks and bonds to balance risk and reward. Real estate investment trusts (REITs): REITs offer exposure to real estate markets without the need to own physical properties. Blue-chip stocks: “Blue-chip” stocks are shares in large, well-established companies with a history of reliable performance.For aggressive investors
Individual stocks: Investing directly in individual companies can offer high returns but comes with higher risk. Sector funds: These funds focus on specific sectors like technology or healthcare, which can offer high growth potential. Cryptocurrencies: Crypto is highly volatile but can provide significant returns. Only invest as much as you can afford to lose!For long-term investors
Growth stocks: Investors might expect certain companies to grow at an above-average rate. These stocks may not pay dividends but can offer substantial capital appreciation. Real estate: Investing in property can provide rental income and potential appreciation over time.For short-term investors
Money market funds: These funds offer higher returns than traditional savings accounts but are relatively low risk. Short-term bond funds: These funds provide income with lower volatility compared to long-term bonds.For socially responsible investors
ESG funds: These funds invest in companies with strong environmental, social, and governance practices. Impact investing: Some investors choose companies or projects that aim to generate a positive social or environmental impact as well as financial returns.
Safe investments
Savings accounts, certificates of deposit (CDs), and money market funds are low-risk options with predictable returns, making them a good strategic fit for short-term goals.
Return-oriented investments
Stocks, mutual funds, and exchange-traded funds (ETFs) have more potential for higher returns but also come with more volatility and risk.
Property
From homes and businesses to rental properties and REITs, investing in real estate can come with benefits like rental income, capital appreciation, and portfolio diversification.
Other forms of investment
Alternative investments like gold, commodities, and cryptocurrencies can help with portfolio diversification, but they can also be volatile, so make sure to have a risk-management strategy in place before you buy
The benefits of diversification
Diversification means spreading your investments across different assets, sectors, and geographic regions. By not putting all your eggs in one basket, you minimize the risk of significant losses from a single investment or market downturn. Diversified portfolios are generally less volatile and have smoother returns over time compared to concentrated portfolios. Even if the value of individual assets fluctuates, diversification can help make sure that your whole portfolio doesn’t flop.
Investing money in a savings account
Savings accounts prioritize keeping your capital safe, so they’re ideal if you have a lower risk tolerance. Unlike stocks or bonds, which may fluctuate in value, the principal amount in a savings account stays stable. The money in a savings account is also typically insured by local deposit insurance, up to certain limits. This protects depositors even if their bank fails, so there’s more peace of mind for you and security for your savings.
Open a savings account
Investing money in stocks
Historically, stocks have higher long-term returns than other asset classes like bonds or savings accounts. Buying well-chosen stocks can turn a tidy profit over time, especially for investors with a long-term investment horizon. Just remember that although investing in stocks can bring big rewards, it also comes with risks, including market swings, company-specific risks, and even losing everything you invested.
Start investing in stocks
Investing money in ETFs
ETFs let investors buy into a pre-diversified set of assets, such as stocks, bonds, commodities, or real estate. Because the investment is a basket of different securities, ETFs help spread risk and minimize the impact of individual stock or bond performance. ETFs also typically have lower fees than actively managed mutual funds, since they passively track an underlying index or asset class. This makes them a cost-effective investment option with potentially higher returns on a long term basis.
Start investing in ETFs
Investing money in crypto
Investing money in cryptocurrencies is unique — after all, it’s not a traditional kind of investment. Cryptocurrencies have sometimes performed incredibly well and yielded high returns for investors, But can also lead to considerable losses. Factors such as government regulations, technological advancements, market sentiment, and macroeconomic trends can all affect the value of crypto. Investors need high risk tolerance and nerves of steel to navigate crypto.
Investing in ready-made funds
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FAQs
- Financial goals: Are you investing short-term or long-term? Do you want high or moderate returns?
- Time horizon: How long can you commit your money without needing it?
- Financial situation: How much can you afford to lose without jeopardizing your financial stability?
- Personality: Are you comfortable with risk or do you prefer to play it safe?
- Not doing enough research before making investment decisions.
- Trying to time the market rather than focusing on long-term growth.
- Investing based on emotions or following the latest trends without understanding them.
- Not diversifying your portfolio, which increases risk.
- Ignoring the fees and costs associated with investments, which can erode returns over time.
The good news: You can invest money even with a small budget. For example, €25 per month is enough for many ETF savings plans — and with some online providers, there’s no minimum. You can start investing in cryptocurrencies with as little as €1. And with interest-bearing savings accounts, depending on the provider, there may be no minimum deposit required. If you compare your income with your expenses, you’ll see how much money you have available to invest.
Your risk tolerance is how well you handle it when the value of your investments goes up or down (or both). Knowing what your risk tolerance is can help you set an investment strategy and choose investments. Here are a few things to think about to figure out your risk tolerance:
To find the right investment for you, you should understand your budget, risk tolerance, goals, and time horizon. For example, if you have long-term investment goals and are more cautious, then a high-risk, yield-oriented investment strategy may not be suitable for you. Plus, remember that you should invest in a variety of financial products to spread out your risk.
An interest-bearing savings account is probably the safest investment, because local deposit insurance protects your account, and you can access your money at any time.
There’s no one-size-fits-all answer to this question. As a general rule of thumb, you should have the equivalent of 2 to 3 months' salary in your account for emergencies. Use our handy 50/30/20 budgeting calculator to figure out the ideal savings amount based on your income.
You don’t need to be rich to invest in stocks. Some investors use online brokers with low or no minimum deposits, or invest in fractional shares or low-cost index funds or ETFs. Some platforms also offer micro-investing options that let you get started with very small amounts.
Stocks are ownership certificates of companies. When you buy shares, you become a co-owner and benefit from any dividend payments or price developments.
Exchange Traded Funds (ETFs) are traded index funds. They’re a pool of investments in numerous companies within a sector or region (or even several regions), and are structured according to the index they track. So, you’re only indirectly investing in these companies.
Consider your goals, risk tolerance, and time horizon. Are you trying to make maximum profits as quickly as possible? Then a high-risk investment might be your strategy of choice — just remember that you’ll need to keep an eye on market movements and try to manage your risk.
With a long-term investment with average returns, you might not see major returns right away. However, fixed-term deposits, government bonds from countries with good credit ratings, or very broadly diversified ETFs are comparatively low risk and may perform well in the long run.
Here are some common mistakes to avoid when you start to invest:
To protect yourself against potential losses, you should diversify your risk — in other words, don't put all your eggs in one basket. How you diversify your portfolio depends on your financial goals, budget, risk tolerance, and time horizon. If you have more short-term goals, you could invest in stocks from different companies, bonds with a short remaining maturity, and various cryptocurrencies, for example.
Another way to diversify is to invest your money in ETFs from different sectors, regions, and focus areas, such as a mix of emerging markets, commodities, currencies, and renewable energies.
If you want to invest in thousands of companies from around the world at a relatively low cost and without too much effort, broad-based ETFs are a good option. For example, you could invest in an ETF that covers many companies from developed countries (e.g., tracking the MSCI World Index) and also choose an ETF that includes a wide range of companies from emerging markets (e.g., tracking the MSCI Emerging Markets Index).
Yes, for ETFs, certain stocks, or cryptocurrencies, you don't need large sums of money to place orders. Keep in mind that trades incur fees and taxes — although there are some providers where you can trade fee-free.
Tip: If you live somewhere with an annual tax allowance, you can set up an exemption order with your bank or broker.