It’s time for another edition of Dollar and Cents. This is where I answer one of your questions.
I ran across one of your articles via Google and wanted to inquire your thoughts on what a first time investor should do in order to maximize ROI. Hypothetically, what are the safest options for a 10,000 investment, and is it enough to get a good head start in the market? Ideally, I would like to double or triple this over time.
Let's talk about it!
With each Dollars and Cents video, we want to provide some follow-up links where you can get some additional information on the topic.
If you are interested in learning more about investing an inheritance, safe places to store your money, and the best places to open up a brokerage or savings account, here are some good reads:
- Best Online Brokers for Beginner Investors – Want to get started investing, but don't know how. Check out our post that outlines the best places online to get going.
- Top Places to Invest Your Money for The Short Term – This post outlines 11 different options to put your money for the short-term. Also good options for people that don't want to take a lot of risk starting out.
- Low Risk Investments with High Return– Does investing give you sweaty palms and elevated heart rate? If so, first go out and buy some good deodorant. 🙂 Next, check out our post that lists 10 different safer options for people timid of the stock market.
Now, Let's Talk Safety vs. ROI
Wouldn’t we all want an investment which gave us a 12% ROI and had no risk? That would be a perfect world.
Sadly, you won’t find an investment with decent returns which doesn’t have some risks.
Think of safety and ROI as a seesaw. The more you have of one, the less you’re going to have of the other. As the old adage goes, “more risk, more reward.”
For example, let’s look at investments with low-risk. There are plenty of investments you can make which have very little risk to them.
Bonds are a common low-risk investment. If you buy a long-term bond, you can get around 4% return on your investment. Bonds will give you a modest return (depending on the type of bond) and they have almost zero risk.
At the other end of the spectrum is stocks, REITs, and high-yield bonds. These are going to have a much higher risk, but there is a chance you could make a lot more money.
For example, you can put some money in a REIT. You could get dividends of 15%, but the real estate market can be shaky.
The Rule of 72
The Rule of 72 is an easy way of determining how long it will take for an investment to double based on a fixed rate.
What you have to do is take the annual rate of return (or the best estimate if it’s not fixed) and divide it by 72. That number is a rough estimate on how many years it’s going to take for the investment to double the money.
The problem with the Rule of 72 is the higher the rate of return is, the less accurate it becomes.
My suggestion is you never use the Rule of 72 as a “hard” rule, but use it as a rough estimate of what you can earn on an investment.
The 50/50 investment technique has become one of the most popular through the years.
The idea is simple, put half of your investments in stocks and half of the stocks in bonds. The idea is the bonds will give you financial security while the stocks give you an opportunity to make much higher returns.
My suggestion is to put half of your money into a CD. You will be able to sleep at night knowing you won’t lose the money, but you can still earn a slight return.
Take the other half of the money and put into some higher risk investments. This can be mutual funds or ETFs depending on your goals and your risk tolerance.
These investments can earn you some extra returns without leaving you high and dry if something were to happen to the investment market.
New to Investing?
If you’ve never invested your money, you might be worried about getting started. Maybe you clicked on this page to get some advice about doubling your money, but you’re scared to put your money on the stock market or you don’t know where to begin.
Thanks to the internet and some fancy algorithms, investing your money has never been easier. There are plenty of websites where you can start investing and they make it as simple as a few mouse clicks.
Betterment is one of the best. All you have to do is create an account, set your investment and financial goals, and then start contributing money. Betterment will handle the rest for you.
They automatically invest your money and will continue to invest it as you earn returns.
Have a question for me? Just let me know and we'll get it on the blog!