Think of investing as a way to make your money work for you. Instead of just sitting in a savings account, your money can be used to buy things that have the potential to grow in value over time. The main goal is to grow your wealth, letting your savings outpace inflation—the gradual increase in the price of goods and services.

To get started, you need to understand the basic building blocks of an investment portfolio. These are different types of investments, often called asset classes, that you can own.

There are four main tools you'll encounter as a new investor. Each has its own purpose and level of risk.

Stocks When you buy a stock (also called an equity), you're buying a small piece of ownership in a company. If the company does well, the value of your share can go up. If it does poorly, the value can go down. Stocks offer the potential for high growth, but they also come with higher risk because their value can change quickly.

Bonds Buying a bond is like giving a loan to a government or a company. In return for your loan, they promise to pay you back the full amount on a specific date, and along the way, they pay you interest. Bonds are generally considered safer than stocks because their returns are more predictable. However, their potential for growth is also lower.

Mutual Funds and ETFs What if you don't want to pick individual stocks and bonds? That's where mutual funds and Exchange-Traded Funds (ETFs) come in. Think of them as baskets that hold a mix of many different investments, like dozens or even hundreds of stocks and bonds.

By buying a single share of a mutual fund or ETF, you instantly own a small piece of all the investments inside the basket. This is an easy way to achieve diversification, which is the key principle of not putting all your eggs in one basket. They are very similar, but the main difference is that ETFs can be bought and sold throughout the day like a stock, while mutual funds are priced just once per day.

There's a fundamental rule in investing: if you want the chance for higher returns, you usually have to take on more risk. There's no such thing as a high-return, no-risk investment. The relationship between risk and potential return is a tradeoff you must balance based on your goals and how much volatility you can stomach.

Generally, stocks are the riskiest of the main asset classes, but they've historically provided the highest long-term returns. Bonds are less risky and offer more modest returns. Cash and cash equivalents (like savings accounts) have virtually no risk of losing principal, but they also offer the lowest returns, often not even keeping pace with inflation. This relationship is why a mix of asset classes is so important for building a resilient portfolio.

Before you start building your own portfolio, it's a good idea to review these foundational concepts.

Now, let's check your understanding of these core ideas.

Understanding these basics—what investments are, the main types available, and the relationship between risk and reward—is the first and most important step toward building a successful retirement plan.