If you have disposable income, you've probably started hearing from your finance-savvy friends that you should be investing it in stocks. But the world of investments can be intimidating, and it's hard to feel like it's worth the risk. Here are a few tips for getting comfortable with the idea of investing, and some good first steps to take as you begin your portfolio.
Why You Should Invest
First of all, it's important to understand the why of investing. After all, you could just be saving that money, or spending it on something you need. The idea behind investing as a private individual isn't just hoping that you'll make more money. As time passes, the value of money changes due to inflation. By investing your money now, you'll be able to fight the effects inflation has on your personal capital. Over time, the money you invest today will compound, and the sooner you invest, the more money you'll make from that compound.
It's also important to have personal goals behind investing. If you're doing it because you need money for something in the near future, you probably won't be able to reach your goals in time by investing. It's better to have a long-term goal, like specific plans for retirement, that you can invest towards and that will keep you motivated to continue.
Usually, finances are considered a private affair, and it can be difficult to ask for help when it comes to investing your own money. But one of the best things you can do as a beginning investor is finding an expert, such as a financial advisor or an expert in property and casualty underwriting, to help you make your initial decisions and offer guidance along the way. It'll mean additional costs, and a truly certified financial advisor can charge quite a bit for their services. But having this guidance, in the long run, will mean making better decisions for your personal goals, as well as having someone to reassure you if things go awry in the market.
Diversifying Your Portfolio
Anyone familiar with the language of finance knows that a portfolio needs to be "diverse". Diversifying a portfolio means that you're investing in multiple types of stock, in order to decrease the risk potential. If you're investing in only one stock and that stock ends up doing poorly, you may end up losing money. It's important to understand how high your tolerance for risk is before making an initial investment. If your finances are pretty tight and you can't afford much loss, playing it safe is the way to go.
Avoiding Bad News
A big problem beginner (and sometimes more experienced) investors can face is the constant barrage of bad news from media reporting on the status of different stocks. It can be difficult not to panic in the face of a sensational headline about a stock you've invested your money in. But it's important to remember that, unlike the media, you're playing the long game with your investments. Even if a stock is doing poorly one day, it may easily change the next.
Keep your initial goals and strategies in mind when you feel tempted to panic, and make level-headed decisions based on your own individual goals. A good way to do this is by focusing on your "savings percentage", or the amount of your initial investment that you've managed to maintain in spite of the volatility of the market.
Maintain Low Costs
You may not be able to control how much your stocks are making, but you can control how much you're spending on them. Pay attention to expense ratios associated with different funds and aim for something on the lower end, which is usually an index fund. On the higher end of the scale are actively managed funds, which can have up to 0.67% expense ratios. Paying high fees for investments may feel like a solid choice at the beginning, but can slowly erode your available funds over time.
Use Automation Tools
Chances are, you don't have time to manage your portfolio as much as it needs on top of your already busy life. That's why it's ideal to set up your investments, retirement and savings deposits, and any other regular financial contributions to be automated. Of course, you'll want to check in on your investments once in a while to ensure that everything is on track, but making the process effortless is key to sticking with it. This will also help you avoid the potential for panic over a volatile market since you'll be seeing the results over time.
Again, the best way to serve yourself as a beginner investor is by starting immediately. There will never be an opportune moment, so use these tips to start investing today and earning towards your goals immediately.