Investing money is one of the best ways to secure your finances. But taking the plunge can be intimidating and overwhelming for first-time investors. While some say that you don’t have to be a financial expert to start investing, you should never begin uninformed, as there are many things to think about first.
Investing is not always an easy thing to do, as there are risks that come with the benefit.
Here are some key things to think about before jumping into the investing wagon:
How much time are you willing to devote to your investments?
You can invest in two ways: active and passive. Both ways have merit, but most experts advise new investors to put their focus on long-term rather than short-term gains. However, your lifestyle, income, risk tolerance, and interests may influence your decision for short or long term investing.
Active investing involves establishing and maintaining your own portfolio. If you use an online broker to buy and sell individual stocks, you are considered an active investor and an Active Investor should be proactive about four things.
1. Do basic research
2. Find investing opportunities
3. Understand the basics of stock analysis
4. Keep track of assets once acquired
No amount of time will help if you don’t know how to properly evaluate assets and businesses. Before investing in stocks, you need to at least understand the basics of stock analysis.
On the other side of the investing fence, many people do not want to spend hours managing money so rather opt to be a Passive Investor. Passive investment has historically generated good returns, whereas active investing has the potential for higher returns, but requires more effort.
Investing passively is like putting a plane on autopilot rather than personally controlling it. Long term, you’ll still get good results with less labour. An example of passive investing is putting money in mutual funds. A hybrid strategy is possible. You might, for example, hire a financial or investing counsel – or a Robo-advisor – to create and manage your investment portfolio.
How much money should I invest?
You may think you need a substantial amount of money to start investing. But, your first question to yourself should be: am I financially ready to invest now and am I able to continue investing frequently over time?
It is important to understand that when you do invest, withdrawing funds may not be a fast process, and essentially is counterproductive to growing your return in the long run. And so, before you invest, consider setting up an emergency fund. Most financial advisors advise saving six months’ worth of expenses in case of emergency. This is cash that has been set aside and is then easily accessible in the event that it is needed soon. You never want to be forced to sell (or divest) your assets in a time of need. Use your emergency funds as a safety net.
Before investing, pay off any high-interest debt (such as credit cards). Consider this: historically, the stock market has generated annual returns of 9% to 10%. If you invest at these rates while paying creditors APRs of 16-18%, you’ll lose money over time.
How much financial risk do you want to take?
Not all investments are profitable. Risk varies depending on the type of investment, but it is generally related to returns. It is critical to strike a balance between profit maximization and risk tolerance. Bonds, for example, provide stable returns with little risk but just around a 2% yield. Stock returns, on the other hand, might vary significantly depending on the firm and the time period. Generally, the overall stock market yields around 10% every year.
Even within the broad categories of stocks and bonds, the risk may vary widely. Low yield bondslike savings accounts are less risky but provide less reward. A high-yield bond, on the other hand, may pay more but is more likely to default. The risk differential between blue-chip businesses like Apple (NASDAQ: AAPL) and penny stocks is wide.
Using a Robo-advisor to design an investment strategy that fits your risk tolerance and financial goals is a great alternative for beginners. In short, a Robo-advisor is a brokerage service that builds and manages a portfolio of stock and bond index funds to maximize returns while minimizing risk.
What are you supposed to do with your money?
There is no ideal solution, and it all boils down to each individuals’ needs. The optimal form of investment is determined by your investing objectives. However, if you follow the above-mentioned guidelines, you should be in a much better position to make an informed decision on where to put your money.
Suppose you have a high-risk tolerance and have the time and willingness to investigate particular companies (as well as the knowledge on how to do it efficiently), this may be the ideal option for you. A bond investment (or a bond fund) may be a better option if you have a low-risk tolerance yet want to earn higher returns than you would from a savings account.
There are many things that first-time investors need to consider before making the move. It is not just about putting money into something and then watching it grow. The most important aspect of being an investor is the research that is needed for the investments to be successful.
Before taking the leap, keep this advice in mind to guide your decision making. Remember to never invest more than you can afford to lose and make sure that you have a fallback plan when finances get rough.