Investing 101: Facts you should know

If the investing game were as easy as Warren Buffett makes it seem, a lot more of us would be millionaires – and I’d be a lot less worried about ways to save on the cable bill. But I learned quite a bit during my time on Wall Street, and one of the main lessons was that before I could play in the majors, I had to learn the basics of the game.

Long-term vs. short-term stocks

Stocks can provide a great return, if you’re investing long-term. According to an article on CNN Money, stocks returned an average of 9.8 percent from 1926 to 2010.

Over the short-term, stocks can be detrimental to your finances – in 2009 stocks lost 37 percent overall. The lesson here is that if you plan on putting your savings in stocks, plan for a long-term investment.

Inflation can erode your savings

Inflation – an overall increase in prices and a fall in the purchasing power of money – has gone up about 3.2 percent annually. In other words, your money is worth about 3.2 percent less every year. That means that you should be putting your savings in investments that provide you with the highest returns. But you have to weigh the potential returns against the risk that you’re willing to take. If the risk is too much, it might not be worth the initial investment.

More risk means a better return

But more risk also means that those investments could fail, resulting in a major loss. Stocks, because they are a riskier investment, often return more than bonds. Unfortunately there are no real guarantees when it comes to the stock market. If you’re looking for a safe investment, U.S. Treasury bonds are about as safe as you can get – the government can always print more money to pay them off.

Diversify

A portfolio with plenty of diversity can keep your risk low. By investing in several types of ventures, you spread out your risk – if one investment fails, another one might succeed. However, spreading out your risk also means that your portfolio might not perform as well if some investments do fail.