Once you have developed the habit of saving you will need to invest in order to achieve growth of your assets. There are numerous ways to invest your money and plenty of advisors willing to take a sizable portion in return for their advice. You would be wise to study and learn as much as you can about investing in order to protect yourself and preserve your capital for continued growth. Investing always confers taking some risk with your money so you need to learn how to minimize risk while generating adequate return on your investments. Depending on how much extra work you want to do, you can choose to invest in real estate, local small business, collectors items or even fund your own small business. Alternatively, you can choose to invest in publicly traded companies and other assets traded through exchange markets. Once again, you will need to learn to protect yourself before you participate and develop a disciplined and rational approach to investing that makes sense for your particular skills and risk tolerance. For many people with vocations other than money management, a "passive" approach to investing with consistent purchases of broadly diversified low cost market index funds, balancing risk among asset classes, using dollar cost averaging to mitigate price fluctuations, will give you the results you seek while reducing the risk of large loss of your asset value.
If you are busy with life, career or other endeavors and do not specialize in money management, read the writings of John Bogle or Warren Buffet regarding the passive approach to equity investing. They teach concepts and a philosophy of investing that is simple for the average investor and will save you time, expense and loss of investment return by utilizing a steady, long term low cost index fund approach. Their teachings are all you need to be a successful investor. Keeping a simple, steady and consistent approach is important. It is easy to become distracted, or to be derailed by conflicting or complicated advice which will always be available. If you keep your expectations for investment returns modest, realistic and consistent with gains in the general economy over time, you will be satisfied. If you think you can outperform the experts and computer algorithms to beat the system, you are far more likely to lose. Similarly, if you become impatient, or change investing philosophies frequently you will most likely lose return on your investments.
Familiarize yourself with market sentiment and market cycles of fear and euphoria in order to avoid falling prey to herd mentality which will cause you to buy and sell assets at the wrong times. In fact, understand the difference between long term investing and asset trading. If you are not a professional asset trader, do not adopt the mentality of a trader. Consider yourself a long term investor. This will help you to feel comfortable with the idea of making purchases and holding them for the long term. Adding savings steadily to your investment portfolio of a balanced handful of assets over time will avoid the urge to buy and sell with the volatile swings of the markets. You must also become familiar with the risk associated with various asset classes. All investments carry some risk of loss. Different economic conditions affect the risk and return of different asset classes, particularly with respect to rates of economic growth and inflation. There is also risk related to the perceived stability of an asset relative to other assets. In order to increase long term return, accepting some increased short term risk is necessary. Balancing your investments so there is sufficient risk to generate reasonable return offset by relatively lower risk assets is sensible, depending on your time horizon. Inflation can reduce the value of certain assets such as bonds and cash, so these relationships are important to keep in mind. Understanding your tolerance for risk, expectation of return, and time horizon are important parts of developing your investment philosophy and specific capital allocation among asset classes.
There is sometimes a difference between current market price and the underlying intrinsic value of an asset. Prices can fluctuate quite widely based on emotion and market sentiment at any given time, even when there is not a significant change in the prospects of the underlying asset. Understand that equity shares are a percentage ownership of a company. Just because there is a market that estimates the value of the future earnings of the company on a daily basis, does not mean that the price estimates are always correct. If your home value was estimated on a daily basis in an exchange market, there would be times you agreed with the valuation and other times when you would disagree. Over time, if you are happy with the home, you would hold onto it and it would tend to increase in value if you invested in proper upkeep and improvements. The overall market for housing would also have an influence on the market price. Similarly, with companies, if customers like a company and it invests in itself to enhance its earning power, it will tend to increase in value gradually over time. If a company does not satisfy its customers, its business is done better by a competitor, or it does not invest in enhancing its earning power, it will lose value and the price will go down.
Most people do not have the time or expertise to properly value companies and other assets. This can be a fun hobby, but index investing is one of the great inventions for the average non-professional investor. Purchasing shares of an index fund gives you a small piece of ownership of a broad representative sample of assets in an asset class. For example, a stock index fund owns shares of the numerous companies that make up various stock market indices, or barometers of overall market performance. By purchasing these shares, you get an ownership in all of the companies in the index and your investment return will correlate closely with the overall performance of the stock market. On average, even with the periodic drops in market value, the markets do increase over time. This strategy removes the need to try to select and predict the good from the bad performing companies, a task that is difficult, even for most investment professionals.
Other indices are available to invest in other assets such as bonds. Bonds are loans given to companies, governments or other entities that issue the bonds by the bond buyers. They are a promise to pay back the principal loaned with interest over a defined period of time. The risk of the bond is related to the reliability of the borrower as well as the status of the overall bond market. Other options for index investing include real estate investment trusts, commodities, international companies and many others. A relatively safe investment portfolio can be constructed with reasonable expected returns and acceptable risk with a simple strategy of index investing in a few asset classes. The key is to start investing and to invest at regular intervals, continuously over time, in good economic times and bad. Buy and hold broadly diversified assets for long periods of time and benefit from the power of compound interest to steadily increase the value of your portfolio. Starting an online brokerage account is easy and free advice is available to assist with portfolio construction. Again, consider reading a short book by Mr. Bogle or an essay by Mr. Buffet on index investing in order to get you started. Saving is just the beginning. Investing your savings and watching it grow is the key to prosperity, economic freedom, and relief from the stress and suffering of financial hardship.