Contrary to what Hollywood would have you think, making money from investment doesn’t come from barking spur-of-the-moment instructions down the phone. Instead, carefully planned, expertly informed decisions are the best way to develop an investment portfolio and grow your wealth gradually. The world of investment can seem daunting to a newcomer, and another misconception is that you will need an enormous amount of money to even begin.
But, in fact, many successful portfolios are built from a few thousand— sometimes only a few hundred— dollars. Equally as valuable as the money you’re using to invest are the choices you make when investing — wise choices will see your wealth expand, and poor choices will see your investments dwindle away to nothing. So, how to make smart investment choices? Read on for some tips.
The Importance of Smart Choices!
Many of us are reluctant to invest our hard-earned savings, simply because of the perceived risks involved. And it is a reasonable position — investment does carry some inherent risk. But these risks can be minimized, and even overcome, by making smart and well-informed choices about where —and when— to invest our money. But in fact, the smartest choice is to invest in the first place — money sitting in a savings account is also prone to devaluation, based on the ebb and flow of the global market, and interest rates most savings accounts offer cannot keep pace with the rate of inflation.
Before you begin investing at all, you need to make some preparations — this is a smart choice in itself. Start by asking yourself these questions:
Why Should You Invest?
Saving vs investment is the main consideration new investors have. If you are planning to invest then you should look at saving as a means of gathering funds to invest. In theory, whatever you invest should keep pace with the market inflation and interest rates in a way that savings won’t. But often, over time, investments will generate a return and begin to grow your personal wealth.
How Much Should You Invest?
Another big question for those new to investment, and one that depends largely on personal circumstances. If you’re happy living a frugal day-to-day life then you will accrue more savings. It’s prudent to put aside an emergency sum to cover living expenses for a couple of months. The rest can be invested. But it can take a bit of time to build the confidence to invest the majority of your savings, and you may want to develop an intuition for making wise choices.
Make An Investment Plan!
Before you begin purchasing assets of any kind, you’ll need to make a sound and realistic investing plan. This should accurately reflect your current situation, your investment goals, and your available investment funds after all the monthly living expenses are covered. Also factored in should be your credit rating and your risk tolerance. It’s easy for new investors to be guided by their emotions, and many make rash on-the-spot decisions — these can derail your future investment path, as well as cause avoidable short-term losses. Strategy is at the core of an investment plan — without a strategy you are essentially gambling with your money. It’s a wise choice to enlist the help of professional services to help assess and guide your investments and to make sure your plan is water-tight and grounded in reality. And of course, once you’ve made a plan, it’s important to stick to it.
Set Goals for Your Money!
Ask yourself this — what do I want to achieve with my investments? For many of us, the ultimate goal is early retirement. This is a long-term goal, and alongside goals such as college tuition funds, major travel plans, and buying a house outright, are at least five years away, especially for investors who start on a budget, or lack experience. Common short-term goals (sub-five years) may be to fund next year’s holiday, to pay for a family wedding, to put a deposit on a property, or to put away into an emergency fund. Whatever your goals, you should fully understand the amount of investment and risk they require, and choose investments based on your tolerance for risk.
Investing in a Volatile Market!
Markets are always prone to sudden shifts, depending on world events. But 2022 was one of the most volatile years in memory, with rising interest rates and inflation, and that’s carried over into 2023. The stock market is always in flux, but usually settles down— although some commentators believe it may be a long time before the ship steadies this time. We also see the real-time effect global events have on the markets, as the current war in Ukraine shows no sign of letting up. Global factors such as war, natural disasters, political upheaval, even weather conditions, affect the way the market behaves. While a volatile market may put some new investors off, most experts recommend mid-long-term investments rather than short-term speculation anyway. So, investing in a volatile market doesn’t necessarily mean your investment is dead in the water — basically, now is as good a time to invest as any.
Knowledge is power when it comes to personal investment, and so it’s best to acquire a reasonable level of understanding about how it actually works. The market is just that—a place where things can be sold and bought, except those things are stocks, bonds, etc. In order to enter the market you must open an investment account (do not use your bank account). This will be full of the cash you’ve allocated and then can be used to buy whichever investable assets you choose. Let’s take a look at your options.
Types of Investment!
There are many ways to invest your money, and there are no hard and fast rules about where to start, although your personal circumstances and capacity for risk are factors in determining the right path for you. The two most common options for investment are stocks (also known as shares or equities), and bonds.
When you buy a stock you’re buying an ownership stake in a publicly traded company. Hopefully, this stock will rise in value, and you’ll be able to sell it for profit. Stocks can be risky— if the market crashes or the company you’ve invested in hits a crisis, you’ll lose money on your investment.
When you buy a bond you are lending an entity money — almost always a company or a government institution. While the money is lent you accumulate interest on your money, and when the bond matures you can take back the principal and your interest. Again, there are risks, such as the company defaulting, or a market crash.
3. Mutual Funds
This refers to a pool made up of several investors’ money which is invested in a number of companies. Although the investment is subject to the same risks as stocks or bonds, it is by nature diversified, lessening the risk.
When you invest in a commodity you are investing in a physical product. These are made up of metals (precious such as gold or silver or industrial, such as copper), agricultural products (wheat, corn, soybeans), livestock, and energy. Investing in commodities is only advisable when you possess expertise about the product. Geopolitical factors bring unique risks to these assets.
Diversify Your Portfolio!
Putting all your eggs in one basket is never a good idea. When it comes to building wealth, diversifying your portfolio is key, and also plays a crucial part in risk management. It’s wise to invest in different types of assets— stocks, bonds, mutual funds, commodities, property etc.— that move at different rates, and function in different ways. This is because they are driven by different factors, so if the stock market were to crash suddenly and all your stocks became worthless (an extreme scenario), the value of your property would be largely unaffected. It’s also important to invest across different industries and geographic areas, as these can be volatile — we mentioned war, political strife, and natural disaster before. If all your funds are tied up in one area then unforeseen geopolitical events can sink your portfolio. Diversification relies on building a certain amount of wealth, to begin with, but it’s the best way to keep your investments moving and give you some peace of mind.
Risk vs. Reward!
It’s wise to remember that you don’t get something for anything when you invest. Larger rewards require larger risks — it’s just a fundamental part of the game. Once you’ve been making investments for a while you might feel a sense of intuition. Trusting your gut can work out well, but if you’re going to take bigger risks, make sure they are as well-informed as possible.
Investment is an exciting way to grow personal wealth, but making the right choices is crucial to success. Many investors make their first goal the building of a nest egg. And it’s good to have a safety net to fall back on should your investments suddenly go awry. As always, hope for the best, and prepare for the worst.