Investments may seem a little overwhelming for anyone starting, but get that bit right, and it really could be a useful tool in growing your wealth over time. Use the following straightforward guide to ease you into investing:
Learn About
Investment Fundamentals
What is investing? Investing is putting your money into
assets such as stocks, bonds, or real estates, with the hope of getting a
return on them sometime in the future.
Important concepts
you should know:
Risk vs. Reward: Higher returns are usually associated with
higher risks.
Diversification: Investing in different assets helps reduce
risk.
Compounding: Making money from your money.
Time horizon: The time period you plan to invest before you
need access to your money.
Set Defined Financial
Goals
Decide why you will invest. A few common goals are:
Emergency fund.
Retirement saving.
Buying a house.
Paying for education.
Your own goals tend to determine investment strategy and
horizons.
Assess Your Risk Tolerance.
Evaluate your comfort level with losses. Younger investors
usually can assume more risk since they have time to recover from any downturn
in the markets.
Risk tolerance is based on: Your age, State of finances, Emotional
comfort with volatility.
Commit to the
Foundation for Strong-financial Planning
Pay off any debts with a relatively high interest rate
before investing; unfortunately, the interest payments on debts often surpass
the expected investment returns.
Set up an emergency fund (3-6 months' living expenses) to
prevent a forced withdrawal from your investment during emergencies.
Select the Right
Investment Vehicle
Retirement Accounts: 401(k)- employer-sponsored retirement
plan (often has a matching contribution).
IRA (Individual Retirement Account)- Tax-advantaged account
for qualified retirement savings.
Brokerage Accounts: For general investing (with no tax
benefits, but more flexibility).
Education Accounts: A 529 plans, for education savings.
Give Yourself an Overview
of the Available Investment Vehicles.
Stocks: Ownership shared in a company. High risk, high
return potential.
Bonds: Loans given to a government or corporation. Usually
lower risk and lower return.
Mutual Funds/Exchange-traded funds: A pooled fund that
invests in a range of stocks, bonds, or other assets for the benefit of a group
of investors.
Real Estate: Investing in property for either appreciation
or income.
Index Funds: A type of mutual fund that tracks an index,
such as the S&P 500. They are great for beginners due to low management
fees.
Robo-Advisors: Automated platforms that assume
responsibility for asset allocation of the portfolios for their clients based
on the noted investment goals and risk tolerance.
Start Small and
Diversify
From low-cost diversified investments, such as index funds
or ETFs.
Don't put all your eggs in one basket.
Invest
Regularly (Dollar-Cost Averaging)
Invest a constant amount each time (say monthly) no matter
the market conditions. In this way, the effects of market fluctuations will be
reduced.
Keep Costs Low
Substantially high fees (for example, management fees,
trading commissions) can erode large chunks of your returns. Seek low-cost
options, such as index funds or ETFs.
Develop Information
and Patience
Keep yourself always informed on investing and personal
finances.
Avoid letting short-term price fluctuations lead your
decisions.
Remember, a slow, steady investing game pays off in the long
term.
Keep Monitoring
and Rebalancing the Portfolio
Revisit your investments at reasonable intervals to ensure
they are in tune with your objectives and risk tolerance.
Rebalance your portfolio when necessary (e.g.- when
necessary, to restrict your objectives, consider selling off some assets to buy
others).
Avoid Common
Mistakes
Timing the Market: Market timing is extremely difficult
to get right, and trying to figure that out is just a risky gamble.
Overtrading: Coming in and out of your investments
often can incur high fees and taxes.
Following Trends: Don't get into investments simply
because they are popular; such moves are reckless.
Seek Professional
Advice if Needed
If ever uncertain, consult a financial advisor or a
robo-advisor to assist you in investing.
Suggested Portfolio for a Newbie
60% in a broad-market index fund (think S&P 500 ETF).
30 % in a bond index fund.
10% in international stocks, so using that international
ETF.
Other Tips
Start early to savor the pleasures of compound interest
Be in good stead and please maintain good discipline.
Do not let fear or greed motivate your decisions.
If you observe each of these steps, you might ground your
investing portfolio. Good luck!
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