Investing can be an intimidating venture, but learning how to navigate the investment market is a life skill with plenty of upside. You can use the returns you earn from your investment portfolio to achieve a number of goals, such as saving for retirement, vacations, a new house, your child’s college education and more. While there are no shortcuts to becoming a successful investor, there are a few main principles you can focus on as you start. Take a look over this guide to gain some insight into these all-important investing considerations.
Why You Should Start Investing
Americans who have a surplus of money frequently let it sit in a checking or savings account at typically meager interest rates. Although saving money should never be discouraged, allowing your assets to remain stagnant can seriously inhibit your finances in the future. Investing is one of the best ways to set your money on the path to growth, provided you know what you’re doing. Because of this, becoming an educated investor is more essential than ever.
But even those with ample interest in investing may find themselves asking when the right time to begin is. The answer is quite literally always the same: now. There are many different types of investments available on the market today. So even if you’re nervous about losing money, you’ll likely come across a few investments that you’re comfortable with. Even if you somehow don’t, it doesn’t hurt to explore what the wide world of investments can do to help you achieve your short- and long-term financial goals.Important Investment Concepts
Every investor has his or her own unique characteristics that, in theory, should dictate the investments they include within their portfolio. In general, these are risk tolerance, time horizon, liquidity needs and income requirements. Being that these terms are foreign to many people, here’s a breakdown of what each means.
The risk and return associated with an investment inherently correlate to one another. This doesn’t mean that safer investments are void of returns, but rather that the lower the risk of an investment, the less return potential it will usually carry. Inversely, high-risk investments could earn you stronger returns in exchange for their volatility. Consequently, risk tolerance is a direct reference to the amount of investment risk you’re willing to take on.
If this is your first time learning about risk tolerance, you might find it difficult to have tangible responses to the questions it poses. However, predeciding what your ultimate investment goals are can help to define it more clearly. For example, if you are nearing retirement, you may want to be a little more risk-averse so you make safer investments. On the other hand, those looking to make a sizable purchase over the next year could gamble on some riskier investment opportunities.
Time horizon is the period of time for which you expect to hold an investment in your portfolio. This is perhaps the most important detail to match with your investment goals, as it’s a major determinant for which investments you select. For instance, you might be simultaneously saving for your child’s higher education in three years and your retirement in 30 years. Because of this disparity, the investments you choose to satisfy each of those goals will be different.
In the context of investments, liquidity represents how quickly your invested assets can be turned into cash. For investors that are saving for the sake of saving or are trying to build an emergency fund, this is an extremely important element to be mindful of. Stocks and bonds are some of the most liquid investments, but fitting them into your portfolio could be tough. Therefore a balance between your need for liquidity and your investment goals is crucial for any investor.
Some individuals may regard returns from investments as a main contributor to their overall income stream. Retirees are the most common type of investor to have these requirements. Even if you’re not retired, though, it’s still beneficial to at least evaluate if this should be a component of your portfolio.What to Invest Your Money In
One of the first steps towards creating a successful investment portfolio is to define your asset allocation. This refers to the specific percentages of certain investment types that make up the entirety of your portfolio. If done well, this can balance your portfolio’s performance and help protect it from harsh downward trends.
An important element of your asset allocation hinges on diversificationthat is, putting your money in a range of asset classes and different investments within those. So if you’re diversifying stocks, you’ll want to buy into companies in different industries and who are different sizes. By combining strong diversification with a balanced asset allocation, you’re setting your portfolio up for safer growth.
In today’s market, there’s a seemingly endless selection of investments, but the core choices remain the same. First, understand what type of investor you are. It’ll become increasingly simple to figure out which of the investments below could be options for you. Let’s take a deeper look:
To be clear, there is no exact asset allocation that works for each risk-tolerance level. However, for the most part, stocks and funds that invest in stocks best serve investors with a high risk threshold. Bonds, mutual funds and ETFs work well for low-risk investors. Every situation is individual, though.Ways to Invest Your Money
The most unrestricted and cheapest way to invest is to open an account with a brokerage firm. Brokerages are the middleman between investors and the market. They offer access to most investments, such as stocks, mutual funds, ETFs and bonds. There are a number of online options available, with some of the most popular being Robinhood and Merrill Edge.
If you’re totally new to the investment game, perhaps the help of a financial advisor could help ease you into things. These professionals often have years of experience dealing with investments and how to integrate them into clients’ financial plans. If you don’t want to commit to a long-standing advisory relationship, many financial advisor firms will provide investment-specific consulting services. The downside to financial advisors: their management fees are often much higher than brokerages.
Robo-advisors are the medium between brokerages and financial advisors, both in terms of services and fees. These automated advisors invest and rebalance your assets according to a preconfigured investment strategy that managers of the robo-advisor construct. This obviously is a much more cookie-cutter approach than a human advisor. But it can provide some of the benefits of professional management and asset allocations.Using a Financial Advisor to Help You Invest
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