From the moment we enter adulthood, we are always told about the importance of investing. Whether it be something as simple as buying a home or putting aside money for our future. However, when it comes to looking at further options, the process can be overwhelming.
The fact is that not many of us are told how to choose an investment type and what the risks are. All we know is that they are volatile and don’t always mean more money. It’s not like they teach it in schools!
In this article, we are going to discuss the first things you need to consider if you are a beginner investor. It may seem like a lot of work, but the earlier you start, the easier it will become.
Assessing your finances
The first step in any investing journey is to take the time to assess your finances. This includes viewing your accounts and the worth of any of your current assets. Where you are currently at will determine what your most appropriate investments are. For example, those with little investing money can start off small with a savings account, crowdfunding, certificate of deposit, or even peer to peer lending. However, those that have a good amount saved up might consider things like cryptocurrency, real estate, or gold.
Deciding what risks you can take
Once you’ve assessed your finances, you can then move on to deciding what risks you can take. As mentioned above, most investment types are volatile, and you may not be in the position to put a large amount on the line.
To find out what your best options are, try and think about your personal goals for the future. For instance, if you have just retired, you’re going to take a different road than if you are investing for your child’s future. From here, you can then determine your risk tolerance.
After sorting out the above, the next step is to physically choose your investments based on your finances and risk tolerance. This can be a complicated process since there are many different things to consider, but it’s wise to spend some time learning about them first. After that, you can then look at your portfolio to see if they work well together. Below are a few of the most popular types:
Stocks: A stock is a type of ownership/share in another business or company. If a company goes well and grows at a steady pace, the price of these stocks goes up. This means you can sell them for a greater profit.
Mutual Funds: Mutual funds pool together money from a group of investors in order to invest in certain stocks and bonds. These are overseen by a manager, who picks where to invest the combined funds.
Exchange-Traded Funds: Similar to mutual funds, ETFs are a collection of investments. However, they are purchased through a fund company, where their price fluctuates. Check out the difference between mutual fund and ETF for more information.
Bonds: Bonds are similar to that of a loan, which is to a corporate business or government entity. As time goes on, you earn back the money loan, plus a predetermined interest rate.
Certificates of Deposit: A certificate of deposit is money that is given to a bank for a certain amount of time. The longer you leave it in the bank, the higher interest you can earn from it. It’s one of the lowest-risk investments.
Alternative Options: Alongside those listed above, there are other more unique options that should also be taken into consideration. These include things like fine art, collections, real estate, cryptocurrency, and music royalties. While they often require a large initial investment, they also have the potential to yield higher returns.
Learning about diversification
Diversification is the term used to describe a type of investment strategy that lowers your portfolio’s risk. It also helps you get more frequent and stable returns. To explain how it works, it’s best to think of it as a basket of eggs. By dividing up your eggs into different baskets, you’re not breaking the whole lot if you fall. The same principle applies to your portfolio. By dividing up your money between different assets, if something fails, you’re not losing everything.
One of the easiest ways to do this is to try and invest overseas. If one market falls, it’s good to have another for support. You may also consider keeping cash or using mutual funds.
Protecting your investments
Since all investments are now done digitally online, cybersecurity and protecting your devices is extremely important. With online hacking and fraud growing daily, you need to find ways to keep everything safe. Using complex passwords, installing anti-virus software, and two-factor authentication are some ways to achieve this.
However, it’s also vital to practice safe searching online. You should never log onto public networks, treat attachments and links with skepticism and avoid sharing personal details with others. Every step makes a difference.
Getting professional help
Lastly, since all of the above can certainly be a lot to handle, getting professional help is one of the best ways to get started if you are really having trouble. Financial advisors can help guide you on the right track, pick the best investment types for your goals, and advise you when it’s time to call it quits. Yes, it may be an extra fee, but if you are struggling with the concept of diversifying and trading, it can certainly be worth it.
While you might be nervous about getting started as a beginner investor, remember that it is possible. It just takes preparation, research, and a bit of saving. Read up on market news, ask around for advice, and don’t be afraid to start things slowly. Investing is no fast process, and it’s going to take some time until you start seeing a profit.
Here are more articles on investing from the California Business Journal archives