Investing has never been easier. Thanks to the innovation of the fintech industry, buying and selling investments is affordable, accessible, and efficient. The barriers to entry have been dismantled in recent years, benefiting retail investors who do not enjoy the same privileges as the power players on Wall Street.
With a buffet of options, how do you even select the right investments for you?
It all depends on your investor profile: risk tolerance, capital, age, and other factors. We have compiled a primer on how to pick investments that are the best fit for you.
What are your Needs and Goals?
Anytime somebody enters the financial markets, this step should be lauded for the decision. Investing is a great way to build and nurture your money, especially in an environment of ultra-low interest rates. But what do you hope to gain from investing in commodities, stocks and bonds? The answer may be, “Make money.” But the world of investing is a little more nuanced.
Indeed, before you hit the buy or sell button, it is vital to identify your needs and goals of trading stocks, buying shares of exchange-traded funds (ETFs), and purchasing units of mutual funds.
Are you investing to optimize your tax? Are you looking to fund your retirement? Are you trying to make up for a lost time as you head into your golden years? There are many aspects to consider when investing, and the answers to these questions will guide your investment strategy.
How Long can you Invest?
When you are in your 20s or 30s, you have a few decades before you are forced to cash out and cover your day-to-day living expenses in your retirement. This means that you can hang onto your investments for a long time and reap the rewards, whether greater returns or quarterly income.
On the other hand, if you are in your 50s or 60s, your window of time might be narrowing. In other words, you may not be able to afford the steep drops and prolonged downturns in the marketplace. Put simply, your age can determine both the length of investing and your risk tolerance.
Differentiate your Investment Types
Knowledge is key to making money in the financial industry. Without it, you are trading blind, potentially risking losses and sacrificing gains without understanding how a sector is performing or where a stock may be heading in the grand scheme of things.
The most crucial aspect of this step is to differentiate your different investment types. It’s like knowing what is the difference between a commercial real estate investment funds from mutual funds.
Although the industry offers thousands of different products and options, here are the primary investment instruments at your disposal:
- Mutual funds
- ETFs / ETNs
- Real estate
- Precious metals
There are traditional investment options and alternative investment options such as private equity, hedge funds, and real estate, that are not traded on public markets. These assets are a lot riskier than traditional, but provide higher returns on average than traditional investments.
Create a Personal Financial Roadmap
Many Americans can be impetuous with their investment decisions, resulting in serious blunders that will cost you money. In general, it takes a lot of research and trial and error to accumulate a decent return on your investing endeavors.
This being said, you can avoid some “rookie mistakes” by creating a personal financial roadmap. Unsure what to do? Here are some tips:
- Examine your overall financial situation and calculate your net worth (assets minus debts).
- Consider your risk tolerance (are you willing to lose 25 percent of your investment if it means gaining a 15 percent return?).
- Establish milestones to ensure you are meeting your fiscal objectives.
- Calculate the fees and costs of buying investments.
- Determine your endgame for each investment you have, whether it is a value stock or a growth ETF.
Put Together a Diversified Portfolio
Every financial expert claims that diversification is the key to unlocking returns, surviving volatility, and weathering any torrential economic rainstorm. This is correct, but for novice investors, it can be challenging to create a diversified portfolio.
There are generally three types of diversified investment strategies:
- Conservative – Little risk tolerance, those who need their money in 10 or fewer years. May do a 50/50 portfolio split between stocks and bonds.
- Balanced/Moderate Growth – Moderate risk tolerance and aren’t looking to cash out for ~20 years. May allocate 70% of funds to stocks, and 30% to bonds.
- Aggressive Growth – High risk tolerance, may allocate 90% of their portfolio to stocks.
Think About Various Investing Tactics
When you learn about the basic elements of investing, the next step to take is to understand the various tactics before you start trading, even if it is the popular set-it-and-forget investing strategy.
Here are some methods that both seasoned veterans and novice traders employ:
- Dollar-Cost Averaging (DCA): Buying investments regularly over time to smooth your purchase price.
- Growth Investing: Finding investments that offer strong upside potential, whether it is technology or agriculture.
- Value Investing: Bargain shopping, or finding value stocks that are on sale, which were prevalent throughout the coronavirus pandemic.
New to Investing? Test the Waters First
After all the research, due diligence, and asking questions, nothing compares to dipping your toe in the financial market and getting accustomed to buying and selling. Whether it is directly buying individual stocks or taking advantage of index funds that mirror the composition of the Dow Jones Industrial Average or Russell 2000, you have to start somewhere!
Here are two ways you can test the waters without risking too much money:
- Utilize free demo trading accounts that are available with a quick Google search.
- Consider an all-in-one checking and investment account.
- Take advantage of free mobile trading platforms, so you do not have to pay egregious fees to buy investments.
One of the greatest feelings in the world is when you invest $1,000 in stock and see it grow to $1,400 a year later. It makes you feel like you are the next Warren Buffett or Charlie Munger. Of course, on the other end of the spectrum, investing $1,000 and seeing it fall to $800 12 months later can have you asking: “Why did I ever invest in the first place?”.
The ebbs and flows of the stock market can be both exhilarating and frustrating, but the investment world is beneficial for everyone as it can protect your money, beat inflation, and help you finance important life goals.
The first step is knowing how to choose investments that are right for you.