Making Smart Investments: A Beginner’s Guide

Reduce the risk factor, increase the reward factor, and generate meaningful returns.

August 26, 2021

HBR Staff/Getty Images/Kristina Astakhova

If you make smart decisions and invest in the right places, you can reduce the risk factor, increase the reward factor, and generate meaningful returns. Here are a few questions to consider as you get started.

• Why should you invest? At a minimum, investing allows you to keep pace with cost-of-living increases created by inflation. At a maximum, the major benefit of a long-term investment strategy is the possibility of compounding interest, or growth earned on growth.
• How much should you save vs. invest? As a guideline, save 20% of your income to to build an emergency fund equal to roughly three to six months’ worth of ordinary expenses. Invest additional funds that aren’t being put toward specific near-term expenses.
• How do investments work? In the finance world, the market is a term used to describe the place where you can buy and sell shares of stocks, bonds, and other assets. You need to open an investment account, like a brokerage account, which you fund with cash that you can then use to buy stocks, bonds, and other investable assets.
• How do you make (or lose) money? In the market, you make or lose money depending on the purchase and sale price of whatever you buy. If you buy a stock at $10 and sell it at $15, you make $5. If you buy at $15 and sell at $10, you lose $5.