This is the fourth post in a multi-part series on how to manage your finances so you can build up your savings, have a safety net, and still live comfortably today without having to live paycheck to paycheck.  Click here for part 3, which discusses your company’s retirement account.

Part 4: Independent investing

In the last article, I talked about investing in the stock market through your company’s retirement account.  Some of you may be interested in supplementing those investments with your own, and if so, this article is for you.

As I mentioned in Part 3, there are a wide variety of investments you can choose from: everything from peanuts (literally), to advanced derivatives and securities.  However, for the average long-term investor, the most appropriate option is stocks.  I should start of by stating I’m not a financial advisor.  I don’t work on Wall Street.  I don’t have much professional experience with the market.  Nothing I say in this post should be construed as advice that needs to be taken without a grain of salt.

But with that said, I do have experience with stocks, and more recently, options.  I’ve been investing since the crash of 2000.  I’ve read.  I’ve read a lot.  In 2008, I co-founded an investment club that trades options.  So I like to think that, at the least, I’m able to recount some of my experiences in the hopes that they could help others.

One of the most staunchly held opinions about the stock market is that it will always go up over the long run.  Properly investing for your future is a matter of buying and holding for a very, very long time.  It’s true that there are other ways to make money on stocks and their derivatives, but most people won’t be getting into those strategies at all.  That’s why I’m going to focus on long-term investment in this article.

There’s a lot of evidence out there that states that you can make a lot of money for your retirement by buying and holding stocks.  The lower you buy, the higher you sell, the more you make.  If you’re just getting into the market, you’re lucky, because now is a perfect time to buy, too.  If you  have extra money available for investing on your own, I highly recommend investing it in the market.

So what do you invest in?

Everyone knows what stocks are – or at least, you have a general idea of what a stock is.  Essentially, one share of a company’s stock gives you proportional ownership in a company.  If a company has issued 100 shares of stock, and you own 1 share, then you own 1% of the company, but the important thing is, you own 1% of its future profits.  That’s kind of a nice idea.  The better a company does, the more you get paid for owning it.  When a stock goes up and down, it could be for a variety of reasons, but the idea is, if you own stocks of a solid company, that company will undoubtedly grow over the long run, and thus, you’ll make more money.

There’s a downside to this too, and I’m sure you know what it is.  If the company fails, or its stock, for whatever reason, goes down, you lose the money that you invested in the company.  This risk of loss plays a huge part in investment strategy, and most financial advisors will tell you that managing this risk is the most important part of maintaining a good portfolio of investments.

In order to reduce this risk of loss, you need to diversify your investments.  By spreading out your money among stocks in different industries, market capitalizations (company size, as measured by total market value), and geographies, you’ll be able to minimize the impact of any one company dropping in value, while continuing to benefit from the economy’s inevitable growth.

Read ahead: Using mutual funds to diversify your holdings

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