How to Make Money by Investing
A sound investment strategy is a great way to accumulate more wealth over time. "Investing helps grow your money over time in ways that are much more advantageous than basic savings accounts," says Chris Davis, an investing expert at NerdWallet. "At the very least, investing can help you fight inflation, but it can also help you save for large future purchases, such as a down payment on a house or a child's education." And while anyone who wants to invest their money in stocks, bonds, rental housing, and so on certainly can, it's important to remember that losing money on an investment is always a possibility. "Investing is all about balancing risk and reward," Davis explains. "Building a diversified portfolio (rather than just owning a handful of individual stocks) helps limit the amount of risk you'll take on."
Interested in learning more about how you can make money by investing? We asked Davis, plus Linda Bell, a financial expert at NerdWallet, and Yalitza Brambila, a financial advisor at Northwestern Mutual, to share their advice, and this is what they had to say.
Know the right time to start investing.
According to Davis, there are a few instances when it's smarter to hold off on investing. "If there's any possibility you might need that cash within, say, the next five years, you probably shouldn't invest it," he says. "Also, if you don't yet have an emergency fund or you're paying off high-interest debt, it may be better to tackle these issues before diving into a long-term investment."
Build a 401(k) account.
If you're a first-time investor, Brambila says opening a 401(k) as a retirement plan is a great way to get your feet wet with the process. Unlike stocks and bonds, 401(k)s typically have a small investment selection that's chosen by your plan provider and/or your employer, usually in the form of mutual funds, that might minimize your risk for loss over time. "When you make contributions to a 401(k) account, you are putting money away for the future," she explains.
Consider investing in individual stocks.
When you buy stock in a company, Davis explains that if the value of that stock rises over time and you sell it—you can earn a return on your investment. "There's no perfect time to enter the stock market, but the longer you give your investments time to grow, the better," he says. "However, it's hard to build a truly diversified portfolio with individual stocks, so it may be smartest to limit them to a smaller percentage of your portfolio due to their volatility."
Invest in exchange-traded or index funds.
For a low-cost investment with strong long-term returns, Davis says to consider investing in exchange-traded funds (ETFs) or index funds. "Index funds and ETFs are bundles of securities (like stocks, bonds or commodities) that offer more diversification through a single investment," he explains. "They're often used by long-term investors who reinvest their dividends to maximize their return. When it comes time, you'll still have to sell these for more than you bought them to earn a profit, or you could start taking the dividends as cash payments, rather than reinvesting them."
Buy a house as an investment.
When you buy a property as an investment, Bell says investors have the opportunity to make money through renting, or by renovating and then selling the property, also known as house flipping. "When flipping a house, if you sell the home for more than the combined purchase and renovation costs, you will end up with a profit," she explains. "One key to buying a successful rental property is to find one with combined costs, including maintenance, insurance and property taxes, that are less than the amount you can charge in rent. Collecting rent from a steady stream of tenants can help you pay the mortgage and build equity in the home."