During periods of inflation when your wage can only buy a fraction of what it used to, items like gas, rent, utilities, loan payments, and groceries may seem like all you can afford, but once you’ve figured out how to budget for those regular costs (and have saved at least some money for an emergency fund), it’s time to start investing.
As a newbie to the world of investing, investing may seem complicated and intimidating at first glance, but it is important to grow your wealth and secure a comfortable financial future. A study by The Sydney Morning Herald shared that three out of four citizens had never invested and 14% of those hadn’t due to the lack of knowledge surrounding investing. That’s why we have compiled a list of tips and tricks to get you started in the world of investing.
1. Define your investment goals
It is important to have goals in mind before investing and ask yourself why you are investing in the stock market. Do you want to build wealth for retirement, save for your future children’s education or simply collect money for a rainy day? If you don’t understand why you’re investing your money, you may make mistakes and lose sight of the bigger financial picture.
The stock market can fluctuate quite a bit so a general rule of thumb when investing is to ensure you’re not investing with money you will need in the next 3-5 years and the timeframe you pick should align with your monetary objections. You should be sure that you understand your risk tolerance so you’re able to prepare to ride the ups and downs which brings us to our next point.
2. Understanding your risk tolerance
When starting it is important to remember to analyze your risk portfolio. Risk tolerance basically means an investor’s ability to endure the risk of losing their capital or investments during a drop in the market.
A risk portfolio depends on a couple of factors such as the investor’s age and financial obligations, for example, if you are a younger person not paying a mortgage and with no children, you are at lower risk than say, an older person with college going children and a mortgage to pay.
How many times during a discussion about finances have you heard someone say that investing in the stock market is just like gambling at a casino or playing the online pokies NZ offers? Well, it’s true to an extent, most professional gamblers are quite proficient at risk management. And there’s a good reason for this as it helps them to win more money.
Knowing your risk portfolio can assist in knowing which investments you should add to your portfolio and help determine investments based on the optimum risk-return value for managing investment risk.
3. Start investing as early as possible
One of the best ways to see a solid return on your investments is investing when you’re young. The earlier you start investing, the greater your prospective rewards could be, and that’s due to compound earnings. Compounding allows your account balance to snowball over time, meaning your investment returns start earning their own returns.
There will always be ups and downs in the market but starting young means you will have decades to ride them out and investing earlier in life gives you a compounding advantage as you’re increasing your earnings by staying in the market longer.
Investing when you are young is ideal, but it’s never too late. Even if you are in your 40s or 50s you still have options such as buying an annuity.
4. Diversify your investments
The idea of diversification is familiar to everyone who has a passing understanding of trading or investing. To put it simply, diversification basically means don’t put all your eggs in one basket, in other words, investments ought to be distributed throughout several industries, locations, and asset classes. You should create a diversified portfolio to avoid losing a lot of your earnings when the market plummets.
- Diversified asset types: A variety of assets, including stocks, corporate bonds, government bonds, real estate, and many others, is what you will require. Some of these assets, such as government bonds, are regarded as low risk, but that also means they offer lower returns. While on the other hand, some assets such as stocks generally carry higher risks, but they yield better rewards.
- Diverse sectors: Not only should you have a variety of assets, but they should also be related to various sectors of the economy. For example, if you only invest in oil stocks, you may suffer a significant loss if oil prices fall.
- Diverse geography: Just having various asset types from different economic sectors isn’t enough. What tends to happen if you own a mix of stocks, bonds, real estate, and other assets all based in one specific location, if that specific economy suffers a downturn, you’ll have a huge loss. That is why you should have a diverse portfolio of assets from around the world.
Some assets and markets are riskier than others but with high risk comes high returns. Emerging markets are considered riskier, like China for example, but they offer the potential for bigger returns, whereas, established markets, like Europe, might be safer but yield lower returns over the long term.
An easy way to diversify is by investing in portfolios run by professionals like ETF portfolios or mutual funds. These experts use their knowledge (and a lot of math) to find the right balance of hundreds (or even thousands) of different assets from every sector of the economy, and all over the world. Over time, some assets will fall and some will rise, but the right asset mix should rise with far less risk than a single stock.
5. Be patient
If you find that one of your investments is performing poorly, it doesn’t necessarily mean that it won’t turn around. Some markets like cryptocurrencies are volatile, while others remain stable.
Be patient and if you are unsure about your investment, you should seek financial help from a trusted investment advisor. Having professionals on your side is never a bad thing, so don’t be afraid to ask for help.
Making your first investment may seem daunting, but it doesn’t have to be. Take things step by step and follow these investment tips for beginners and remember the best day to start is today.