It was Albert Einstein’s belief that the most powerful force in the universe was compound interest. Whether you are planning for further education, retirement or for any financial reasons, investing is a great way to get you where you need to be.
A common perception of investing is that it is a risky venture. True that many have won or lost significant fortunes, but those are both ends of the extreme. The truth is that it is all controlled and manageable. If you do not subject yourself to risks you are uncomfortable with, you will most likely not encounter more bad surprises than you can handle.
The earlier you start the better chance you have to secure a healthy financial future.
Start by getting to know yourself. Don’t jump into investments without having definite financial objectives. A good plan depicts clear statements of these objectives, like buying a house in five years, or the specific lifestyle you desire if you are saving for retirement. The timeframe you set to achieve these goals is just as important as their actual value.
The next step is to identify which category of investor you belong to. This will mastermind the outline of your investment mix.
1. Short-term Investor: The grand idea here is to guard against inflation by keeping your risk to a minimum for capital preservation.
2. Low Risk Investor: You want to grow your income in the safest possible way by adopting investments that have little fluctuations and/or offers regular dividends.
3. Basic Investor: It is within your comfort zone to accept minimum negative returns in return for the possibility of higher average returns in the long term.
4. Growth Investor: You are able to handle potentially significant losses in exchange for the chance to earn significant returns.
Once you determine your category, you can diversify your portfolio accordingly later.
Knowledge is Power
Get acquainted with the different types of common investment instruments: bonds, stocks and mutual funds. You could get a financial advisor to do the planning, but you would still need some basic education to consider suitable recommendations.
Stocks are generally good for long term investments. Their prices will go up and down constantly based on their perceived value. When you purchase stocks from a specific company, you become a partial owner. This means the price is influenced by supply and demand – stock prices increase when interested buyers outnumber sellers.
Purchasing bonds means you are essentially lending money to a company/government for a specific period of time. They are considered to be one of the safer investment vehicles around. Keep in mind that there is an inverse relationship between bond prices and interest rates. This means that bond prices increases when interest rates fall, and vice versa.
Mutual funds are managed by professional money managers to provide an instant diversified portfolio of stocks, bonds and other securities. It is a good idea to start here if you have limited funds or no time to make individual purchases.
Tips for Beginners
• Start small – Until you have a better grasp of investment strategies, it is better to pace yourself by investing in small amounts. Consistency over time adds up.
• Spread out – Don’t put all your eggs in one basket. That way, if you make a bad decision, you will not lose it all.
• Pick stocks carefully – Go for a company in the industry that you are most familiar with. Don’t buy into just about any stocks just because the price is low.
• Monitor your investments – Keep an eye on your money. That is just common sense. Take appropriate steps to capitalize on a good investment choice, or remove a bad one.
• Adopt a disciplined approach – You should always have an eye on the prize. Make sure your investment mix is in line with your objectives. Don’t go rampant on impulse investing.