Investing
By: Source: AARP.org Date Posted: 2006-04-17 12:35:57.898703-04:00
What is investing?
Investing is when you use your savings to buy something you think will earn a decent amount of income and/or go up in value over time. The concept of "investing" is confusing to a lot of people, but it doesn't have to be. Investing is not the same as saving or trading. And setting goals is important to being a successful investor. Here are some thoughts on what investing is—and isn't.
Investing vs. Saving
Many people confuse saving with investing, but they're not the same. When you put money away in a safe place instead of spending it, that's considered saving. Investing is when you use your savings to buy something you think will earn a decent amount of income and/or go up in value over time.
Taking money from your paycheck and putting it into a money market fund for a new car is saving your money. Putting money into a stock mutual fund to build a retirement nest egg is investing your money.
Investing vs. Trading
Investing is different than trading. Generally, the difference lies in how long you hold onto what you buy.
If you're trying to time the market—buying low and selling high as quickly as possible—then you're trading. You may not even care what you're buying and selling, as long as you can buy something cheaply and sell it at a higher price.
There's no solid evidence that market timing works. Successful trading requires close attention to price trends, the courage to make quick decisions, and plenty of luck. Trading can be expensive; there can be a lot of costs associated with all those transactions.
If you're investing, on the other hand, you're making decisions for the longer term. You buy something because you believe it's valuable now or likely to become more valuable over time. For example, you may try to invest in well-managed companies you believe will earn profits over time and reward you for investing in them.
Investing Success
Investing "success" is not the same thing as "making the most money." Success can come in many different shapes and sizes; it all depends on the goals you set.
For example, say you and another person both put money into a safe money market account to protect your money. The account earns 2% interest annually. Your purpose is to save enough money to buy a car in six months and not lose what you're saving. Six months later, you've earned very little money but you haven't lost anything. And you have enough to buy the car. You've succeeded. The other person wants to grow money over 15 years for retirement. She earns very little, just as you did. After 15 years of low earnings, she's fallen well short of her goal and can't retire comfortably. She was unsuccessful.
In short, success depends on whether you achieve what you set out to achieve. And if you don't know what that is, you won't be able to identify success or failure.
Good investing follows good planning.
To succeed in investing, you need to set a goal and create a plan for getting there on time. If you know where you're going and why, you will:
- Have some guidelines for making decisions about your money
- Be more likely to make good decisions
- Be able to recognize whether or not you've succeeded
- Feel more in control of your money and your future
Additional Resources
Take the Investing for Success web course, an educational program jointly sponsored by the National Urban League (NUL) and the Investment Company Institute Education Foundation (ICIEF).
Additional Related Links
Allocating Your Money to Meet Your Goals
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