If you’re new to investing, knowing where to start can be daunting. But don’t let the complexity dissuade you. The basics behind investing in the stock market, mutual funds, and other common methods are easy enough to learn with proper guidance.
This is a contributed post and does not necessarily reflect the opinions of Meet The Harris Family.
Here are some options for how you might do that:
1. Keep in Mind the Definition of Risk vs Return
Risk and return are two terms that might not be foreign to you, but when it comes to investing, you need to learn their stark differences, depending on what kind of an investor you want to become.
Risk, as defined by people who have been in the investment industry for a long time, is how much an asset can potentially give a negative return, whereas return is how much money you get from your investment.
To control your risks and maximize your returns, you might want to figure out your risk appetite by asking yourself questions like, “How much can I lose before I get uncomfortable?”
By knowing your tolerance in taking risks, you can assess the different types of investments available in the market.
2. Diversify Your Portfolio
One of the trusted principles in investing is not to put all your eggs in one basket. In other words, learn to diversify your portfolio. With diversification, all your investments will most likely move in the same but opposite direction, thereby minimizing the impact of one investment on your total portfolio.
If you’re investing to save for your child’s education and you put all your money into a UITF (Unit Investment Trust Fund), then if that fund declines or loses value, there goes all your savings.
Usually, you want to have short-, medium, and long-term investments. Short-term ones may include cash, debt securities, and T-bills. These usually have a one to two-year maturity. Along with this are medium-term securities such as stocks or bonds that mature in five years or more. Lastly, you have your long-term investments that include REIT (real estate investment trust) and equity funds.
3. Create an Emergency Fund First
Here’s an essential tip for you: don’t start investing until you have an emergency fund. While you can be strategic on how to grow your money, at the end of the day, you can lose everything in an instant. What happens when you have a major expense such as healthcare?
To build an emergency fund, you must have a minimum of three months’ worth of your expenses in a high-interest savings account. This should be the most liquid asset, which means you can easily convert it into cash. In other words, don’t tie this with real estate or other investment vehicles even if the risks are incredibly low.
4. Learn from the Experts
One of the best resources you can use to guide your investment journey is experts. Since these veterans have more knowledge and experience, they know what’s best for you when it comes to good investments.
Some hire mentors, especially during the first few months of years of investing. However, if you are diligent, you can use free resources such as online forums, Facebook groups, or YouTube channels where people educate others about finance.
Take note that experts exist with scammers. As you browse the Internet, read reviews so you can determine if an expert is credible or not.
5. Do Your Own Research
After tapping the resources available to you, be sure to do your own research before making any investment move. Just because someone says something is a good investment doesn’t mean you have to take his or her word for it.
Consider many factors, such as the market condition, politics, and situations of the economies. Keep in mind also the quality of the services provided by investment companies.
You should also look at your tolerance for taking risks. Sometimes what seems to be a good investment is not really that good. In addition, take note of the fees involved in making transactions. Read the fine print so you won’t go wrong with your investments.
6. Don’t Wait Too Long
The currency of any investment is time. With time, you can buy your money with less effort.
However, if you put it in the bank for too long, inflation will eat into its value. Instead of waiting several years to make big bucks, look at ways to maximize your returns without taking too much risk (e.g., using compound interest or dollar-cost averaging).
Investing is a great way to grow your money and reach financial goals. However, you also need to be wise about it, especially if you’re a novice. These tips can help you get started more confidently.
