Learn How to Invest
Learning to invest your money is an easy task for most people. Investment decisions are filled with uncertainty, questions of doubt, stress, behavioral biases, fears, greed, and more. But even with the difficulties of investing, it remains an activity that everybody should put effort into and know about. It’s not easy, but it will help you to get more out of life and to feel more financially secure.
Why should I save and invest?
Saving and investing go hand in hand and you should think of them as siblings, family, or two peas in a pod. This means that as you save, you invest, and no they aren’t the same thing. The process of saving, is typically thought of as keeping cash in the bank or cash on hand for rainy day expenses or for retirement. When people save, this isn’t really a risky behavior per say, although there are risks that can be presented to the saver. Once money has been saved, the next thing to do is to think about investing those savings. Investments are different than savings in this example by one major way, investments will yield a return than can be a lot more than a savings account rate. Savings account rates in the recent time are less than 1% while the earnings on an investment account can range up much higher(lower) based on the level of risk you take as an investor. The old saying holds true that the the more reward you get is often in line with the amount of risk that you take on.
So, as we are saying, the reason to invest is to earn a higher return the capital that you have at risk. The typical risk for a domestic bond is less than an domestic equity, and both have lower returns that their foreign counterparts. So, domestic equity will often return less than Foreign equity. And along the lines that we are discussing, foreign investments are other more risky than their domestic counterparts. There are a lot of factors that go into this higher required rate of return, but just know that if you decide to invest internationally, you are taking more risk in hopes of getting a higher return than US based returns. The simple reason for this is that international investments require a higher return to compensate for additional risks that aren’t part of domestic investments.
10 Tips to keep in mind while learning to Invest
Disclaimer: These are simply suggestions for you to get a beginners understanding of major investment concerns and topics. Please speak with a financial professional to devise a specific strategy for your investment needs.
- Determine your risk and return requirements. Do you have certain goals that must be sustained from your investment portfolio? And as we mentioned above, the amount of risk that you take may go in line with the expected return that you can generate.
- Determine your constraints or the limits on your investing. In this section you will note wha you want and don’t want from your investment strategies and implementations.
- Research the various methods of investing. Do you want to invest directly into stocks, bonds, futures, commodities, or options, and derivatives. Or are you more comfortable investing into funds such as exchange traded funds(ETFs) or mutual funds.
- Read daily periodicals to keep up with current market, political, and world news.
- Watch a TV business & investment channel like CNBC or Bloomberg TV. This will help you to get ideas for research and analysis. Remember these are just suggestions that you must back with a solid understanding the fundamentals and valuation .
- Buy some books – It is essential with investing to learn from those before you. You can do this easily by reading some investment books for beginners that will help to show you the way.
- Compounding is everything – Take to heart the concept of compounding and you’re already have a great concept under your belt. This is the ability of your money to grow upon itself and to grow at an increasing rate. This is due to the fact that as your money grows, the capital base will grow leading to greater returns in the future.
- Know your limitations – Don’t invest in things you don’t understand or don’t have the time to closely monitor. The last thing you want to do is get extended too far out over your skis and also to not follow what you put your money into.
- Stay consistent – Transaction costs, taxes, and turnover are not the investors friend. So pay attention the the aforementioned and also always remember if you are dealing with a taxable or non-taxable account account.
- Don’t be afraid to call a professional – You don’t need to manage all of your investments and when you get started you probably don’t want to take on managing all of your investments. You can try to learn picking a couple of stocks that may be a small percentage of your total investment dollars. This will allow you to get exposure to making selections without taking on too much decision risk…or the risk that you’ll be making bad decisions. Over time, the decision risk will go down and you’ll be more comfortable and more successful with your decisions.
It takes time – Put your attention to investing
Like most things in life, what we put our attention to we get better at. It is definitely true in the case of investing, that the more effort you put into investing the better your results will be over time. So the old story goes, what you focus on will become a reality. This is a truism that holds in many parts of life, but when you put a lot of effort into anything that thing will typically blossom. So, let’s explore how this works with investing.
First, the more investment decisions you make over time will typically correlate with how well you become as a decision maker. Typically, as you make an increasing number of decisions, you will have a chance to see how those decisions turn out, and you’ll be able to assess what you did correctly and what things you may have overlooked or not seen initially. This is called hindsight, and hindsight is a great tool in the world of investing. For anybody who is investing, and will do it over time and for an extended period of time, it is essential that you monitor and track not only your successes but also your failures. Because in life we can learn a lot from our failures and we can use those failures to help build a roadmap to ensure that similars experiences don’t happen in the future.
Next, as you put a lot of effort and attention in the investment decisions you make, you will gain experience about certain security types, companies, issues, etc and your decision making skills will broaden and become more robust. This means that over time, you should begin to become more proficient and professional in your approach to investing. When you first start out, most likely your decision making skills will not be at a high level, and this will lead you to make decisions, that down the road you may not make. This experience, will build over time so don’t worry. As you start out, you’ll want to be making more decisions with less risk behind them. So, this means that you’ll want to make a higher number investments with a smaller dollar amount assigned to each investment. This will keep the risk down. Also, as I mentioned above, you should probably have a professional managing most of your assets as your begin to invest directly. This can be in the form of a broad index mutual fund or ETF. For example, you can have 90% of your investments in mutual funds while the other 10% in direct investments that you make. This way if you make a bunch of investments and diversify with the final 10% of your portfolio you should be diversified and overall not taking too much risk.
Finally, you’ll want to honestly assess yourself over time. Let’s face it investing isn’t for everyone, and it requires a lot of hard work. So, before you begin you’ll need to realize that you’ll have to make a commitment to your assets and be ready to work hard. This type of commitment will have to be daily, and should be something that you are interested in and enjoy. Let’s look at an example. I personally hate working on cars. The parts are typically all heavy, they jobs are typically messy, require a ton of cleanup, involve many specialized tools, involve toxic waste, use harsh chemicals, etc, etc. So I personally hate working on cars, but for some they put effort into it, and have a passion for autos. So, would I be a candidate to open a mechanics garage? No…the answer is definitely no because I have no interest in it, I don’t enjoy it, and I know that I’ll never enjoy it. So, I put less than zero effort into it, and if my car breaks I take it to a specialized shop so a professional can fix it. BUT, for many hobbyists and enthusiasts who love cars, they can have fun and save a lot of money by fixing and repairing their own cars. In our case, you’ll need to assess just how interested you are in investing and making decisions for your future savings. If you just dread it, and know that you will not enjoy it, then you’ll need to probably find a professional to take care of it for you.
Final thoughts on Learning to Invest
After you put some effort into it and start making a few simple and small investment decisions you’ll quickly get a feeling for how interested and dedicated you’ll be toward learning to invest. But just remember, that no matter whether you decide to take on more responsibility with your investments or not, you’ll need to be very familiar with many of the terms, and investment strategies to help guide your professional. Investment professionals typically have a narrow scope and so, you’ll need to make sure that you’re abreast of trends, issues, taxes, scope, for the professionals that you hire.