Sound investing is about more than making some extra cash on the side and playing the market. First, you need to hold on to the money you earn, and second, you need to make that money work for you by learning how to invest. If you want to learn how to invest your money, you will first need to invest in your abilities and trust yourself to make sound decisions. Study, and believe in yourself, and only make investments that you understand. The following tips can help guide your investment education and help you determine you have the most to learn.
One: Take Care of Yourself First
It can be all too easy to get caught up in the excitement of Wall Street and trading and forget about the importance of the basics of personal finance. If you are currently buried in consumer debt, live paycheck to paycheck, and spend without discretion, you will want to get those things under control.
Before you invest anything in securities investments, build your foundation. Start by creating a budget that allows for paying off your debt aggressively and saving around 20 percent of your take-home pay if possible. Work to pay off all credit card balances and car loans. Create and grow an emergency fund, so you won’t need to go into more debt when the unexpected arises. Then you will have a sound foundation of financial self-discipline and preparedness on which to build your financial success.
Two: Ask for Help
Especially when you are first getting started, it can be motivating to have someone who can answer your questions and help you get started. This could be the customer service representative at your brokerage, or an investment advisor, accountant, or a friend or family member who works in the financial industry. Remember, a non-professional won’t be able to give you personalized financial advice, but they might be able to help with basics such as opening and funding a new account and explaining how things like fees and trading work.
Three: Keep it Simple
Rather than worrying about sophisticated trading strategies or intense market research or financial analysis, focus on the basics. Work on investing a specified amount of money each month, automatically, rain or shine. To keep things simple and low-cost, Mutual Funds or ETFs (Exchange Traded Funds) can be helpful in that they allow you to create a diverse portfolio without the need to invest in individual stocks (and incur the risks and trading fees associated with that). Try to find a fund that you can invest in every month and stick with for the long haul. Don’t be tempted to trade in and out of funds regularly, as this will most likely cause you to miss out on long-term growth while paying excessive taxes and fees.
Four: Think Long Term
If you are like many new investors, you probably have your money in a tax-advantaged retirement account such as a 401(k) plan or IRA. Investors using these retirement accounts are sometimes best served by a conservative long-term growth strategy. These are funds that invest money to retire at a specified target retirement date. These funds allow your money to grow over many years while keeping fees and management needs to a minimum.
Five: Be Consistent
This is the principle of dollar-cost-averaging. The idea is to invest a fixed amount of money each month. In a bear (downward trading) market, the money will purchase more shares of stocks. In a bull (upward trending) market, the money will purchase fewer shares of stocks. This practice is easy to automate and results in a disciplined and consistent approach.
Six: Start Small
Every dollar counts, and you don’t need to wait until you have a large chunk of cash to transfer to your investment account. If you buy a mutual fund or ETF with a low minimum, no load, and no transaction fees, you can set up automatic purchases or invest whenever you have some extra money. Some mutual funds, such as those from Charles Schwab have minimum initial investments of just $100, with future investments allowed as small as $1.
Diversification is crucial with any portfolio, yet it can get quite costly to manually diversify if you are buying individual stocks or a wide variety of funds. It can be helpful to purchase funds that are already internally diversified, and which have meager fees. Once you’ve invested in an index or another diversified fund, try to avoid trading in and out of them to keep your trading fees low.
Eight: Control Your Emotions
Many investors are easily tempted to watch financial news and place trades right away based on what they see as dangers or opportunities. However, for the most part, this tends to lead to paying very high fees and missing out on long term growth. This sort of behavior makes a lot of money for brokers and online trading websites but is rarely in the best interest of the individual investor.
Nine: Reassess Each Year
As the year goes by, individual investments in your portfolio will rise and fall in value, markets will change, and you will grow closer to reaching your financial goals. When you set up your portfolio, choose an asset allocation strategy that fits with your risk tolerances and financial goals. As your preferences and goals change, you can update this strategy to reflect them. Each year, you can rebalance your portfolio to get back to the asset allocation you desire.
Ten: Don’t Be a Day Trader
As you may have gathered from tip eight above, it is often a fool’s errand for individual amateur investors to try to time the stock market. It tends to result in excessive trading fees, unnecessary taxes, and missing out on gains you would have seen if you’d only remained invested. Better approaches include investing in broadly diversified funds or stocks from well-established household brand companies and sticking with them for the long haul.
Overall, it is essential to know what your goals are for your portfolio and to understand what you are buying and why you are buying it. It is also important to have self-discipline and not get caught up in the temporary hype of daily news cycles. If you stick with sound investing practices for many years, you can grow a healthy portfolio and reach your financial goals.