7 Things You Will Need To Know As A Newbie Investor
As someone looking to invest, you might not have a proper plan. Here are seven things you should know to make an informed investment decision.
If you have spare money lying around or are simply saving up for the future, you might think of investing in businesses or assets like stocks and bonds. While not everyone is an expert in such investments, one should not make impulsive decisions without considering the long-term outcomes.
In a potentially volatile market, investing can be a tricky task, especially for a newbie. To make things easier, we have created the perfect guide to help you make your first-ever investment decision.
1. Set Your Financial Goals
Even if you are known to be a risk-taker, you might want to sit down and create a financial plan before investing. The key here is to achieve financial security in the long run, despite the level of risk you are willing to take in the current investment scenario.
If you are familiar with financial plans, you will successfully curate a plan to illustrate your current financial situation and how much you can save or invest. However, if you have not done this before, the chances are that you may need financial professionals' help.
2. Research Thoroughly To Evade Scams
Scammers are always looking for unsuspecting less-educated investors to prey on. Whether it is on the internet or in real life, their primary strategy is to use popular news related to a specific company and its profits and use that as “evidence” of how legit their business is.
If you stumble upon an investment opportunity that sounds too good to be true, ask every sort of question, and consult with unbiased sources before you invest. Similarly, talking to your friends and family about it and asking for their opinion will not harm either. They might even spot the scams before you do.
One of the best examples is Amazon Prime Profits, which uses fake testimonials and photoshopped income statements and news claiming how one can earn $500 per day for free just by doing a “trick.” If you want to learn more, this article on prime profits from NoBSIMReviews has a detailed review that will help you identify potential scammy businesses you will inevitably come across.
3. Keep a Healthy Balance In Your Portfolio
Not all the investments are going to fetch satisfactory returns. One might outperform the other. To make sure you do not face low returns by investing in only one asset type, create a portfolio with a mix of all sorts of assets. This way, you will be eventually receiving more returns than losses in the long run as the assets' win-lose situations will balance each other out.
Similarly, if you intend to stay on the safe side by not choosing to invest in mutual funds or stocks, your financial goals might not get achieved since the returns will be considerably low. Therefore, here is a risk you will have to take, which will be discussed in the next tip.
4. Establish A Comfort Zone For Risks
Before you invest in risky securities, you have to commit yourself to the fact that you may or may not lose all of your money. This is because, unlike federally insured deposits, such securities are not insured in any way. This means if you lose, you will be losing the principal amount.
You might now ask, why do people invest in securities if it is so risky? The answer is simple – significantly higher investment returns.
However, if your financial plan is short-termed, you might not feel confident investing in high-risk asset categories. Instead, invest in treasury bills or short-term government bonds. The only disadvantage here is the potential risk of inflation, which might outdo the rate of returns, which will fail the sole purpose of investing in such bonds.
5. An Emergency Fund Will Always Come in Handy
Even if you are not an investor, you must save sufficient money in savings accounts or equivalent products in case of sudden health, unemployment, or loss of stock related emergencies. Your emergency fund should consist of both the earning interest and ease of accessibility. With savings of at least 3-6 months of your income, you will be prepared for any financial crisis.
6. Reduce Risks By Dollar Cost Averaging.
Instead of investing all of the money at once, add a fixed amount of money consistently to your investment over a long period. By following this strategy known as the “dollar-cost averaging,” you will find that you will be buying it when its price is low and not too high. This is helpful if you invest in volatile markets where there is a risk of losing a significant amount of your investment.
7. Rebalance Your Portfolio Every Now and Then
This strategy does not mean that you are indecisive or not committed to your investments; this simply means you are making sure your portfolio will not concentrate on specific asset categories. You can adjust the allocation according to the level of risk you prefer. However, do not change your entire motto – stick to “Buy Low, Sell High” at all costs.
You may be wondering about what is the right frequency of rebalancing. Most financial experts recommend rebalancing portfolios every 6-12 months. Others recommend rebalancing when you notice an increase or decrease in your asset classes' relative weight compared to what you previously identified. Both strategies are beneficial in their own ways, although infrequent rebalances show the best results on average.
You will have to invest in any way sooner or later to secure your retirement income. If your employer allows you to invest via 401(k)‘s, make sure you contribute to it as soon as possible and as frequently to make your retirement savings more attractive.
If you do not want to wait for the investment results that long, there are other options, you can invest in. But before doing that, make sure you conduct thorough research and homework. We hope our tips help you make the best decision.