The most effective way to build wealth is to invest money. Putting your money under your mattress will slowly reduce your net worth, because inflation reduces the value of each individual dollar. Savings accounts are better, but their interest rates don’t compare to investment. Investment, while risky, is the key to big money.
But how can you invest when the world is changing so much? Investors in the 1990s bet big on internet firms, but the dot-com bubble burst and left many of them penniless. What if you bet on an industry that takes a major hit next year, or in 2020, or in 2025? The world is changing quickly, and it can be tough to feel comfortable betting on it. Here’s how to do so safely.
Make a bet!
Yes, it’s hard to know which industries will grow in the future – and even when we do know, it’s tough to know how fast they will grow. The internet is incredibly important these days, so investors in the 1990s weren’t wrong to think that web-based companies were destined for greatness. But they missed their guess about how many of these web startups would make it big, and they overvalued companies that hadn’t yet proven their worth.
So look for industries with bright futures that you think are currently undervalued. Legal marijuana is booming in some states, and may soon enter new ones. Can you find a way to invest in that industry? Do you believe in its prospects?
Scary as it is, making bets can be fun. If you’re lucky, you could strike it rich. And if you’re unlucky, you’ll be protected by the next several tips in this article!
Hedge your bets
The safest way to invest is to diversify. That means having lots of different types of stocks. Imagine you were betting on the internet in the 1990s. You would’ve been in trouble when the bubble popped – but you would have been in a lot less trouble if you had most of your money elsewhere, spread across other growing industries.
Let’s say you believe in a bright future for hybrid cars, legal marijuana, and companies that are based in China. Instead of deciding on one of these to bet on, bet on all of them – and you’ll be in better shape if you’re wrong about one.
Your safety net
Investing in growth markets like China and growth industries like legal marijuana can lead to big returns, because those spaces have a lot of room for rapid growth. By contrast, investing in a company like General Electric won’t give you much rapid growth. General Electric is huge, so it’s not going to double in size. So why doesn’t everyone invest in a Chinese start-up instead of General Electric?
Because, of course, General Electric will not go out of business without warning, and it’s likely to grow slowly but steadily along with the economy. General Electric and other “blue chip” companies are safe(r) bets, and your diverse portfolio should include plenty of them. Look for index funds that track big companies, and consider other low-risk investment options, too – like short-term bonds, which offer limited growth but low risk.
You can also invest in alternative investments, which can help you weather a bad spell in the traditional market. Commodities like gold may hold their value or increase while stocks are taking a beating, so diversifying with commodities investments is not a bad idea.
Be ready for anything
As you can see, there are two keys to investing in our ever-changing world: attempt to anticipate change, and protect yourself in case you fail. Your big growth opportunities will come with bets you make on growing markets and industries, but remember that the majority of your money should always be in other investments. You should own risky stocks, safer stocks, some bonds, and some alternative investments, if possible. By spreading out your risk and making bets at the same time, you can enjoy the benefits of our changing world without laving yourself too exposed to risks.