Starting your investment journey can sometimes be scary especially when you don’t know where to begin. However, it doesn’t have to be that way. Below are a few things that I consider to be very essential as a beginner and that will go a long way in your investing journey:
1. Know your risk profile
When it comes to investments, risk and return typically go hand in hand. Investors expect. A higher returns is a compensation for bearing higher risk and vice versa. Different criteria affect how much risk we as investors can and should take. The most important factors you should consider are: a) your investing horizon (your age), b) your current financial situation, c) your goals and your personality.
The younger you are, the longer your investing horizon is, as a result, you can seek out bigger returns by taking bigger risks. This is because the riskier the investment, the higher its volatility is. However, if you have a short time horizon, there is a higher risk you may have to sell your investments at a bad time, causing you to lose money unlike if you have a longer time horizon, you will have time to recoup possible losses since you can wait out bad times and sell at a favorable time.
Your financial situation is another important factor. The more money you have and earn from your sources of income, the more risk you can bear. You shouldn’t invest money you can’t afford to lose or to have tied up for some period of time. Otherwise, you may be forced to sell off your investments at an unfavorable time because of liquidity issues.
Lastly, your personal goals affect how much money you want to earn, and therefore how much risk you must take. The bigger your goals, the higher your risk and return shall be. You should also consider what kind of risk tolerance you have. Investing shouldn’t make you lose your sleep or cause too much extra stress. If it does, then you are in the wrong investments. However it’s also important to get out of your comfort zone to earn money with investments especially for the young people.
There are a number of risk profile quizzes on the internet that one can take to help you know your risk profile. Do at least three and answer them honestly before settling on a risk profile.
2. Have a personal investment portfolio statement
An investment Portfolio Statement (IPS) is a document that states your general investment plan, goals and objectives and describes the strategies you will employ to meet these objectives. It should also highlight specific information on matters such as asset allocation, risk tolerance, and liquidity requirements.
IPSs are more commonly written between fund managers and their clients however, I cannot insist how important it is in your own personal investing journey. You should think of an IPS as a kind of personal investment plan which will establish a degree of professionalism to the process of managing your money, while minimizing emotions and irrationality when it comes to investment decisions.
The most important reason is that it will provide you with guidance for consistent informed decision-making. It will serve as both a road-map to successful investing and a bulwark against potential mistakes or misdeeds that will cost you heavily e.g. a common example of an investment mistake most of us do is getting into investments because they are on trend without evaluating whether it is best for you. Remember the quail egg trend? or buying a plot trend?
Coming up with the IPS may not be easy but visit a financial advisor to assist you in coming up with a personal IPS that best suits you. By putting your financial purpose in writing, you’ll be better able to focus on your goals, instead of the crisis of the day.
3. Have a basic understanding of all investments in your IPS
The first rule of investing is: Do not invest in something you do not understand. And I cannot emphasize this enough. The sad truth is that it’s very easy to make money in today’s market, however, it’s even easier to incur huge permanent losses if you aren’t careful. It’s very important to have a basic understanding of all investment options in your investment portfolio. Most of us fail terribly in investments and want nothing to do with it, since we put our money in products we do not understand.
Take time to understand what/where you are putting your hard earned money into, how it works, risk associated with it, and more important how it will make you money. This will save you from losing money through things like Ponzi scheme or selling your investments at a loss. Remember brokers and investment providers are there to make your journey smoother but more important earn their living. So always remember you are fully responsible for your money & investments. No one will take care of your money better than you can.
PS. None of this content is financial or investment advice. It’s for educational purposes only. Please do your own research and/or consult with a professional if you want advice customized to your specific situation.
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