So you've decided to begin investing.
You've been reading up on investment advice and stock picks, but most things you read already assume you know what you're doing.
The problem is... you don't.
It can certainly be overwhelming when you first decide to invest. There are so many options to choose from — like mutual funds, bonds, ETFs, options, individual stocks.
And there's a lot to consider and take into account before you even decide on an investment strategy.
Investing isn't like gambling — just throwing your money in the slot machine, pulling the lever, and hoping to come out with more than you put in... It's a lot more complicated than that, and it requires much more knowledge. Even though some of it's chance, there will always be factors you can't anticipate or control, your strategies and decisions are the main factors behind your success.
Get to Know Yourself
The first thing to do isn't to get to know the market — it's even more basic: Get to know yourself.
This means taking into account not only your own reactions and tendencies, but also your investment needs, goals, and capabilities.
First, consider your personality and how that could play into your investments. If you would panic after any loss in your portfolio, it may be wise to stay away from high-risk investment strategies. If, however, you would remain steady and wait for a rebound, or take time to review the company information and issues surrounding the drop, you might not fare too poorly with something a bit more risky.
You are probably choosing to invest for a particular reason. But don't think of investing as a get-rich-quick scheme. If you do, you're likely to make high-risk decisions that won't be a good choice for your portfolio.
Even billionaire investors like Warren Buffett and George Soros think of investing as a means by which to stay where they are, or save and gradually build wealth. This mentality will help you make more informed, wiser choices.
So second, consider your goals: Are you saving for retirement? Setting aside money for a child's education? Looking to save up for a house or a car? If you set out clear goals for your investments, you can more easily tailor them to your needs.
The third thing to do is make yourself aware of your situation — and what that means for your finances. Being married with children puts you in a different financial boat than if you're single and don't have financial dependents. It will also control how much you are able to safely invest. You don't want to risk it all in the hopes of growing your wealth quickly and greatly. Be aware of your capabilities.
Do you have a lot of outstanding debt? Debt is another thing you must consider when investing. If you have high-interest debt and plan on investing before you pay it off, you might not be as satisfied as you anticipate. The odds are low that the return from your investment is going to surpass a high interest rate, so plan on settling those debts before investing, not after — otherwise, you could become buried in even more debt.
As a final step in covering your finances, you should make sure you have money set aside. This should be separate from any additional money toward your investment goals, day-to-day expenses, and regular bills. Call it an emergency fund and make sure you have enough in case something unanticipated occurs.
This may be something you already have. It's a smart move for anyone, as you can never anticipate what sort of unexpected incidents might occur in which you'll need additional cash: emergency car or home repairs, medical bills, unemployment.
All in all, you want to make sure you are really ready to invest. Have your finances in order and think the whole thing through.
And if you're ready, start investigating...
Now it's time to look carefully with a sharp eye at all your options.
You need to do your research, dig deep into individual companies and larger investment options, and determine where you should begin.
This part of the process can be overwhelming because of the number of options available.
Here's a brief rundown of some investment options:
Stock – Purchasing a company's stock gives you partial ownership of that company. If you own a common stock, you have voting rights at shareholders' meetings, and you will receive periodic dividends. If you own a preferred stock, you cannot vote, but receive priority in terms of dividends and in the event of a company bankruptcy.
ETF – An ETF, or exchange-traded fund, tracks an index, a commodity, or a basket of assets. In this way it has been compared to a mutual fund, though like a stock it can be traded throughout the day on an exchange. These investments have high liquidity, low fees, and no minimum investment, making them attractive to investors.
Bond – You can buy a bond from a company or the government, and it functions as a sort of IOU. Essentially, as a bond holder, you loan money to the institution, and your money accrues interest. As long as you hold your bond to maturity, you will get back the face value plus interest.
Mutual Fund – Like an ETF, a mutual fund tracks multiple assets, a group of stocks, or bonds. A number of investors will pool their money into one mutual fund, and a money manager will take charge of investing the funds. Because the fund is professionally managed, it can be attractive to investors who wouldn't otherwise have access to something like this.
Remember, this is just a very brief list. Every one of these investments carries risk, and there may be other options that are better for you.
Do your own due diligence and look into each of these options more thoroughly — taking your goals into consideration — before deciding how you should build your portfolio.
Secrets of the Trade
There's an unwritten set of rules that successful investors follow when building or adding to their portfolios.
Knowing these tricks of the trade will help you become a smart, strategic investor.
Diversify your portfolio. One of the critical things many first-time investors don't know to do is to diversify their portfolios. Too often investors get stuck in a rut, picking assets from the same industry or a number of assets that are directly affected by one another. Put that way, I'm sure you can see where the problem is: If one falls, they all fall. The number one thing you should do when choosing your investments is diversify your portfolio. You could invest in a number of individual stocks or mix stocks and indexes. But again, make sure you diversify asset classes.
Have a buy price and a target price. When you're looking to purchase a stock, you should set a target range in which you will buy. Then set up a target price at which you plan to sell the stock. If you have this planned in advance, there will be no deliberating about how to handle the situation if the stock you're watching rises or falls. You can estimate the stock's value by looking at the company's discounted cash flow analysis, and this can help you determine how high it might go so you can set a realistic target price. You don't want to wait so long that the stock falls again, but you do want to give it some room to move around.
Make time. If you're serious about investing, you should know that you'll need to set aside time to keep a sharp eye on your investments and the companies or establishments that hold them. Stay up to date on the latest news from these establishments and watch for any upcoming news that may move the stock one way or another. This doesn't have to command all your time, but you should take a little time at the beginning or end of each week to read up on the company's financial and news updates.
Don't be another sheep in the flock. If everyone jumped off a bridge, would you? That same phrase Mom used when she wouldn't let you get your way should become your mantra for investing. Doing the same thing as everyone else can lead you to risky investments or poor choices. Never do something just because the herd makes it seem appealing. Use your own judgment and the hard facts of company numbers.
It might be a good idea to meet with an investment professional or someone who can help you determine the best moves for you. This individual will work with you on a personal level and help you consider your investment goals and capabilities to find the best investment strategies.
You may also want to sign up for a few investment newsletters. They can keep you updated on sector news and big meetings or announcements that could move stocks.
A free subscription to Wealth Daily will give you daily insights into the investing world — including top information on commodities and trading and first insight into new sectors.
But you have to do your homework... Investing is an active way of saving money; you can't passively let it sit.
So take the time to review everything about yourself and the methods of investing that sound most appealing. Once you've done all this, you're ready to start investing.