Although you can invest on your own, it requires specialised knowledge and experience to do so successfully. You should be well-versed in the subject matter and know the pros and cons of a particular type of investment in order to reap returns. But not everyone possesses the in-depth knowledge and expertise required for making successful investment decisions, so it is necessary for those types of investors to refer to a guide to start investing. There are a number of factors that come into play for ensuring a successful investment, including:
How much time do you want to put into investing your money?
The investing world has two major camps when it comes to the ways to invest money: active investing and passive investing. Both styles have merit, as long as you focus on the long term and aren’t just looking for short-term gains. But your lifestyle, budget, risk tolerance, and interests might give you a preference for one type.
Active investing means taking time to research investments yourself and constructing and maintaining your portfolio on your own. If you plan to buy and sell individual stocks through an online broker, you’re planning to be an active investor. To successfully be an active investor, you’ll need three things:
Time: Active investing requires lots of homework. You’ll need to research investment opportunities, conduct some basic analysis, and keep up with your investments after you buy them.
Knowledge: All the time in the world won’t help if you don’t know how to analyse investments and properly research stocks. As a guide to start investing, you should at least be familiar with some of the basics of how to analyse stocks before you invest in them.
Desire: Many people simply don’t want to spend hours on their investments. And since passive investments have historically produced strong returns, there’s absolutely nothing wrong with this approach. Active investing certainly has the potential for superior returns, but you have to want to spend the time to get it right.
In the case of passive investing, you’ll still get good results over the long run, and the effort required is far less. In a nutshell, passive investing involves putting your money to work in investment vehicles where someone else is doing the hard work, like the case of mutual fund investing. Or you could use a hybrid approach, for example, you could hire a financial advisor or use a robo-advisor to construct and implement an investment strategy on your behalf.
How much money do you have to invest?
You may think you need a large sum of money to start a portfolio, but you can begin investing with a small amount. The amount of money you’re starting with isn’t the most important thing, it’s making sure you’re financially ready to invest and that you’re investing money frequently over time.
One important step to take before investing is to establish an emergency fund. This is cash set aside in a form that makes it available for quick withdrawal. All investments, whether stocks, mutual funds, or real estate, have some level of risk, and you never want to find yourself forced to divest (or sell) these investments in a time of need. The emergency fund is your safety net to avoid this.
Most financial planners suggest an ideal amount for an emergency fund is enough to cover six months’ worth of expenses. While this is certainly a good target, you don’t need this much set aside before you can invest, the point is that you just don’t want to have to sell your investments every time you have some other unforeseen expense come up.
It’s also a smart idea to get rid of any high-interest debt such as credit cards before starting to invest. Think of it this way, the stock market has historically produced returns of 9%-10% annually over long periods and there’s no benefit in making those returns if you’re paying off more in credit card charges.
How much financial risk are you willing to take?
Not all investments are successful and each type of investment has its own level of risk, but this risk is often correlated with returns. It’s important to find a balance between maximising the returns on your money and finding a risk level you are comfortable with. For example, bonds offer predictable returns with very low risk, but they also yield relatively low returns. By contrast, stock returns can vary widely depending on the company and time frame, but the whole stock market returns almost 10% per year on average.
Even within the broad categories of stocks and bonds, there can be huge differences in risk. Savings accounts represent an even lower risk but offer a lower reward. On the other hand, a high-yield bond can produce greater income but will come with a greater risk of default. In the world of stocks, the difference in risk between blue-chip stocks like Apple and penny stocks is enormous.
One good solution for beginners is using a robo-advisor to formulate an investment plan that meets your risk tolerance and financial goals. In a nutshell, a robo-advisor is a service offered by a brokerage that will construct and maintain a portfolio of stock- and bond-based index funds designed to maximise your return potential while keeping your risk level appropriate for your needs.
What should you invest in?
That’s the tough question, and unfortunately, there isn’t a perfect answer. The best type of investment depends on you, but based on the guidelines discussed above, you should be in a far better position to decide what you should invest in.
For example, if you have a relatively high-risk tolerance, as well as the time and desire to research individual stocks and to learn how to do it right, that could be the best way to go. If you have a low-risk tolerance but want higher returns than you’d get from a savings account, bond investments or bond funds might be more appropriate.
If don’t want to spend hours of your time on your portfolio, putting your money in passive investments such as index funds or mutual funds could be the smart choice. And if you really want to take a hands-off approach, a robo-advisor could be right for you.