Maybe it sounds too good to be true, but you can double (even triple!) your money just by learning a few new words.
I used to contribute only to an unmatched 401(k), but once I figured out about mutual funds and bonds, I realized I could be doing so much better. That 401(k) was barely keeping pace with inflation! Investing hadn't felt like an option for me, purely because I didn't know what it was. If you can speak the language, you can get in on the action. Let's start with "diversify your portfolio." All it means is that you should have a variety of investments, like stocks, bonds, or real estate, with different risk levels and rewards. See? Easy. Here's my two-step guide to raking in the returns, starting with some key terms you ought to understand.
1. Know Your Options
Bond: When the government or a corporation needs to raise money for, say, a shiny new machine or a better bridge, it does so by selling bonds to the public. If you buy a bond, at the end of the bond's duration you'll get paid back the full value (or "principal") plus interest. Bonds are safer than stocks, but have lower earning potential.
Index fund: An index is a group of stocks within a specific section of the market, like the S&P 500 (made up of 500 of America's largest stocks). Instead of buying each of these stocks individually, you can use a brokerage firm to invest in an index fund. Buying a share of an index fund gives you exposure to a sector of the market.
Mutual fund: This is a ready-made portfolio of stocks and bonds that is a communal investment (a bunch of people pay into the fund to pool their buying power) and relatively easy to maintain. Mutual funds are operated by money managers, who shuffle assets to try for the biggest profits.
Exchange-traded fund: This is like a mutual fund, but it can be D.I.Y. (no manager needed) and traded like a stock. You'll get exposure to stocks in multiple industries, like technology and energy, by buying just one ETF.
2. Manage Your Investments
Set a goal to ultimately invest 10 to 15 percent of your paycheck. These tech tools will help you monitor your portfolio and track what you're earning and spending.
Robo-advisors: Services like Betterment set you up with a portfolio of ETFs, then use algorithms to adjust your investments for optimal returns so you'll keep making money. Basic plans typically cost around 0.25% of your account balance annually.
Hybrid advisors: Platforms like Empower (formerly Personal Capital) pair a financial advisor who helps you set investment goals with algorithms that build a diversified portfolio designed to get you where you want to go.
Self-directed brokerages: Brokerages such as E-Trade, Fidelity, and Vanguard let you pick stocks, bonds, and mutual funds and monitor your investments, and most now charge $0 commission on online stock and ETF trades. Your returns may vary, of course, but the important thing is you're in the game.
Ready to open your first account? Read how to start investing with $100 and Roth IRA vs. 401(k), or explore the First-Time Investors hub.