The thought of investing brings about a picture of the stock market and various charts moving up and down. For a beginner, it can indeed be a daunting task. But it doesn't have to be. As a matter of fact, investing is not about looking at charts day in and out. It revolves around knowing yourself, not committing basic errors and staying the course. Read on to find out more.
A little knowledge and awareness of the basic concepts and principles can make investing easier.
Here are some of the bare minimum things you need to know before you invest :
- Set your financial goals.
- Increase your financial literacy.
- Know your risk tolerance.
- Know the difference between saving and investing.
- Know about dollar-cost averaging.
- Build your emergency fund.
- Know the importance of diversification.
- Know the cost and fees involved with investing.
- Decide where you want to invest your money.
- Monitor your progress.
1. Set your financial goals
To determine your financial goals, ask yourself why you want to invest. Do you have any short-term goals like saving for a vacation, or do you want to save for that branded purse? Or, are you looking at saving for a comfortable retirement or, are you thinking of having your financial security and flexibility to pursue your dreams and ambitions or funding for your kids' education.
Having clear goals makes it easy to pick an investing strategy that is suitable for your goals.
Learn more : How to set SMART financial goals
2. Increase your financial literacy
A little bit of financial knowledge can go a long way in preventing bad financial decisions. Take advantage of resources that are available online - from subscribing to financial newsletters, listening to podcasts, using government resources, using money tools etc. Understand the risks, features of the different investment options.
Being financially literate helps identify scams and spot all those red flags in get rich quick schemes.
3. Know your risk tolerance
There is always a limit to the amount of risk that one can take. This varies from person to person. Different investments have different levels of risk. Ask yourself how you would react if the value of your investments declined. If you take more risk than you can handle, sooner or later you will have to rejig your investments.
Take a comprehensive risk assessment to know if you are a conservative, moderate or aggressive investor.
4. Know the difference between saving and investing
Saving is a precursor to investing. Saving is for the short-term - this includes your purchases, your emergency fund, your splurges etc. Investing is for the long-term - this includes your retirement planning, saving for buying a house, saving for kids' education etc.
Bottomline : Take the money that you have saved and invest it to create wealth.
Learn more : Why do I need to invest?
5. Know about dollar-cost averaging
Dollar-cost averaging is investing consistently in equal amounts at regular intervals irrespective of the ups and downs of the market. It means you will buy more of an investment when the price is low and less when the price is high. This reduces investment risk during market volatility.
Dollar-cost averaging reduces your cost and stress levels.
6. Build your emergency fund
It is recommended to maintain at least 6 months of living expenses as an emergency fund so that you are prepared when there is an emergency.
Without an emergency fund, you may have to pull out money from your investments.
7. Know the importance of diversification
Spread your investments across various asset classes, sectors, industries and countries.
Diversification helps reduce your overall risk and increase your chances of capturing opportunities in different markets.
8. Know the costs and fees involved with investing
When you invest, you will also have to pay for various costs and fees such as commissions, management fees, expense ratios, transaction fees etc. These costs and fees can eat into your returns. A smart move is choosing to invest in a low cost index fund as opposed to an actively managed mutual fund.
Always pay attention to fees and charges and try to minimize them as much as possible.
9. Decide where you want to invest your money
Decide whether you want to invest in stocks, bonds, real estate etc. What are the investment options that you are comfortable with. Read up on the how these investments are structured and how easy it is to invest in them. A good rule of thumb is to pick simple investments that are transparent, easy to understand and easy to track.
Often the decision on which asset class to invest is guided by the time frame of your financial goal.
Learn more: 5W and 1H of Investing
10. Monitor your progress
Track your investments regularly. Keep an eye on the markets and also any changes to your financial goals. While some investments are the fill it and forget it kind, you cannot just let go. Follow through and keep a tab on how they are doing. If nothing else, the growth in these investments will reaffirm your strategy. And the dips will keep you honest on your expectations. To make sure your financial goals are on track, you can monitor them quarterly or yearly.
Remember investing can be easy but it is never quick.
And finally:
Don't wait for the right moment to get started. It is possible to start investing with even a little money. Just start investing as soon as possible and invest consistently
