Investing for beginners
Why should you invest money? This article is a guide for new investors, covering important sections to consider when deciding to invest money, starting with an investment policy statement and deciding how much money to invest, what financial markets to choose and ending with a few important tips.
Why invest money in the financial markets
The answer is to build your wealth, grow your income for retirement, have the financial freedom to achieve your goals and dreams, build wealth for your children, make us of the compound returns. The most common mistake new investors make is not getting knowledge about the risks and investing in financial assets they do not understand or are not suitable for their investment profile.
What is the first thing all new investors should do? Write an investment policy statement
What is an investment policy statement? It is a statement that defines in written the investment risks, returns and constraints related to any investor’s profile. If you are a new investor you should write down what is the level of risk, you want to undertake. What are the required returns per year? What are your constraints, such as liquidity, time horizon, taxes, legal, regulatory? Any reasons that you do not want to invest in any specific financial asset, for example, cryptocurrencies. With the investment policy statement, you will write and set your goals and what you want to achieve in investing. A roadmap not to get lost.
Where to invest money?
There are plenty of investment vehicles that beginners can use to increase their wealth, such as stocks, bonds, ETFs, Forex, CFDs, commodities, even cryptocurrencies. Almost all of these investment options offer the potential to earn a much higher rate of returns compared with a savings account. But there is something to always remember, that they also involve different degrees of risk. Assuming you have written your investment policy statement you are now familiar with the risk of the financial assets such as equities, bonds, commodities. For new investors, these three asset classes are more than enough to cover all their investing needs.
What investment returns can you expect?
The answer is not as much as possible, because this is both naïve and involves a lot of risks. The real answer is a yearly return that is logical, covers the inflation rate, compensates for the risk and will help you achieve your goals, such as retire in 30 years. A return of about 5%-10% is both realistic and not an abnormal one.
How much money should beginners invest?
There are many theories about this answer. In general, the more capital you can invest, the better, assuming you do not take excessive risk. You can decide how much money to invest depending on 3 factors:
Your financial goals
- How much you can afford to invest and when
- Your risk tolerance for all financial assets
- Your financial goals to achieve
Simple answers to questions like what are your financial goals, why are you investing? For what reason will you need money for in the future can help you decide the exact money to invest.
You can start investing 5% or 10% of your net income as a starting point. And increase that over time if you can help you achieve your financial goals faster.
Investment time frames can also affect risk tolerance. If you are 60-year old and plan to retire in 5 years and have never invested before then you should only think very conservative. Invest in bonds and stocks that offer an attractive dividend yield, and only a small amount of your total capital. If you are 30-year old, then you can take more risks to grow your wealth over time.
When should you start investing?
The answer is as fast as possible. Even with small amounts of money. The power of cumulative returns is that it is always best to start investing as soon as possible. Assuming you can achieve a 5% return per year missing 3 years of investing will result in missing about a 15% increase in your net wealth. It will be marginally more than 15%.
Tips to get started with investing
Invest always for the long-term and try to contribute over time capital to your investment portfolio.
Manage your investment risks and diversify them as well
Regularly monitor your investments, at least one time per month and make well-informed financial decisions after getting enough of education on various financial assets
Balance investment risk and reward to achieve your goals and do not get disappointed with the results
Understand your investment options and choose wisely the ones that fit into your profile as a new investor
When to not Invest
You should never invest money you can’t afford to lose. If you will need money in one year from now maybe the idea of investing in stocks is too risky. Always think that risks exist in the financial markets and can reduce your capital at any time.
What is the best investment strategy?
A long-term approach to investing, with the ability to withstand losses and give plenty of time to your capital to grow at its highest level.
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