You might think that investing means getting into high level financial instruments that are best left to the experts, but the truth is you can start with even a small amount of money and it doesn’t have to be complicated at all. The following are five things every new investor should know.
1) Your Personal Financial Goals
The first step to investing is to set financial goals. A proper goal is SMART; specific, measurable, attainable, realistic and time-bound. You should be able to read your goal statement and have a clear picture of what you want to achieve. The goal statement acts as a jumping off point to calculate how much you need to save and how much time you have to do it in. For instance, you may want to buy a home in the next five years. In that case you would need to save up for a down payment which means you can save a little every month. How much you save would depend on a number of other factors including your income and your level of expenses.
2) Your Risk Tolerance
Risk tolerance is a fancy financial term to express the discomfort you feel when you know an investment return is not guaranteed. Some people thrive on taking more risk for the chance of a higher rate of return, while others lose sleep if they are not sure of the outcome of an investment. It is important to know how much risk you can tolerate as this will determine the kind of instruments that will work best for you.
3) The Difference Between Investment Options
There are a number of different investment options available. Stocks, bonds, mutual funds and exchange traded funds are just a few of the most popular. A basic understanding of the different characteristics of each can take you a long way as a new investor.
4) Why Asset Allocation is Important
Asset allocation refers to the way your money is divided among competing investment options. For instance, you may have some funds in a money market account, own some stocks on the stock market and have a fixed deposit set to mature in five years. The way available income is spread over different asset classes should be aligned with your goals. In other words, if you have short term goals such as buying a car within a year, you should have the funds available to do that without breaking your fixed deposit or being forced to sell stocks if the price is not right.
5) Where to Find Financial Help
Finally, you should know where to find financial help when you need it. You can educate yourself by reading books or blogs or you can hire someone to guide you on the right path.