Investing is one of the best ways to expand your wealth, yet getting started may seem intimidating. Here is an introduction that may help get you on your way.
Step one in investing is determining how much to put away and when (your time horizon). Step two involves selecting an account such as a 401(k) or personal brokerage to invest with.
1. Know Your Investment Goals
Goal setting helps motivate individuals as they work toward reaching their investment objectives. Goals also influence risk appetite by showing how much an investor can afford to lose should their investments decline.
Establishing your How2Invest goals and time frame are crucial first steps toward understanding how to invest. For example, those preparing for their retirement nest egg may feel comfortable taking more risks than someone who wants to save for college education or purchase property.
Due to individual goals varying significantly and your tolerance for volatility, investments for shorter-term goals typically fall under liquid investments such as cash and treasury bills; mid-term investments might suit higher-risk assets like stocks; while long-term investments may need a combination of strategies.
2. Determine Your Risk Tolerance
Risky investments depend on how much of your savings you are willing to put at stake when the market drops. Although it’s possible to profit in stocks, taking too many risks could cause you to lose much more than you could gain.
Idealy, it is best to determine your risk tolerance with the help of a financial professional. A typical questionnaire will ask about time frame, income needs and willingness to tolerate market fluctuations.
This will provide an accurate depiction of your risk tolerance, which will be invaluable when creating a portfolio tailored specifically to your goals. For instance, someone planning for retirement in 2022 might wish to invest more aggressively than someone saving for college tuition or purchasing their home in two years. On the other hand, those with stable jobs without high interest debt might feel more comfortable investing in more volatile assets over the long haul.
3. Invest Smartly
Investing requires setting aside money on a consistent basis over time – this discipline could pay dividends over time!
Investors should focus on the long term; buy-and-hold investing is one of the surest ways to realize significant monetary gains over time. Legendary investor Peter Lynch once recounted how his stocks increased tenfold.
Diversifying a portfolio is also recommended, since different investments and asset classes tend to lead or lag at various points during a market cycle. Dividends should also be reinvested as this can increase long-term returns. Furthermore, keeping abreast of market news can help ensure you make decisions based on accurate knowledge instead of emotions or short-term trends.
4. Be Consistent
Consistency in investing is key to long-term success, yet it can be challenging when the market fluctuates erratically. Daily news updates could easily tempt us away from investing, especially since no one knows if this is just another temporary stock market correction or the start of another “bear market”, where gains may disappear entirely.
Consistency lies at the core of financial success: finding and adhering to a strategy that fits your goals, risk tolerance and budget, then sticking with it. One approach that may prove particularly powerful in this respect is dollar-cost averaging (investing regularly, such as monthly). Doing this allows you to skip market timing altogether while buying more shares when prices are low while purchasing less when prices are higher – helping average out your cost per share over time and reduce emotional reactions such as fear and greed that can derails progress.