Having the financial freedom to fund your goals is one of the greatest achievements in life. Having access to funds allows you to pursue your vision with confidence and enables you to do what’s best for you.
Unfortunately, investing isn’t as easy as it seems. There’s a lot of information, but knowing what’s right for you can be difficult.
If you’re new to investing, our guide is for you. This guide will cover everything from the basics of investing to risk-management frameworks and portfolio construction, all geared toward beginner-level investors.
What is investing?
Investing is the process of buying and holding assets, hoping to earn a return on those investments. There are five main types of investments:
- Stocks are investments made in companies that issue stocks. You can purchase them via stock market exchanges like the NYSE (New York Stock Exchange) or NASDAQ.
- Bonds are investments made in government or corporate debt issued by governments or entities like corporations. They can be purchased through government agencies such as the U.S. Treasury Department or a financial institution like a bank
- Real estate involves purchasing, owning, and managing real estate assets such as residential and commercial properties. Investments in real estate may include residential real estate property loans, residential real estate property financing, residential real estate property M&E, or investment properties
- Commodities include investments made in precious metals, agricultural products, and other underlying assets that fluctuate in value due to economic conditions in the market. They may include gold mining shares, agricultural commodities finance, equity funds investing in stocks of commodity companies
- Currencies: Whether trading foreign currency pairs like EUR/USD or buying and holding cryptocurrencies like Bitcoin or Ethereum, you can make a bank if you correct fundamental and technical analysis.
Remember, investing is an important part of personal finance for individuals looking to build their financial security and wealth. However, it’s vital to understand investing concepts and terms before investing money to make informed decisions and avoid any hiccups.
Saving vs. investing
Saving typically involves putting money into a fixed-income investment such as a CD or savings account, while investing is used to make money multiply over time in hopes of earning more than what was initially invested. However, investing requires understanding fundamental concepts such as safety, liquidity, and risk.
While saving is often considered a safer option, it can be riskier than investing due to the risk of inflation eroding away the value of the saved money over time. On the other hand, investing includes taking on risks in exchange for the potential of higher returns. As a result, beginner investors must be cautious when investing their money. To help illustrate the differences between saving and investing, the table below summarizes some of the key characteristics of each:
|Generally considered a safer option||Involves taking on risk in exchange for potentially higher returns|
|Involves putting money into fixed-income investments||Requires an understanding of fundamental concepts such as safety, liquidity, and risk|
|It can be riskier due to inflation||Beginner investors must be cautious|
|Focuses on the preservation of capital||Focuses on long-term growth|
|Offers lower potential returns||Offers higher potential returns|
In the end, the goal of finance is to achieve the best return on investment (ROI) while balancing risk and reward. Both saving and investing are aimed at creating financial security and stability for individuals and their families.
What is considered a ‘good’ investment?
Investing can be an intelligent way to achieve financial goals, but it’s essential to do it wisely. A good investment should have a high probability of meeting your financial objectives. Standard investment options include stocks, bonds, real estate, cryptocurrency, and self-employment assets.
However, avoiding being swayed by hype or trends when making investment decisions is crucial. Diversifying your portfolio can help mitigate risk and ensure a decent ROI.
To become a savvy investor, learning about behavioral finance is essential, which will help you make sound decisions and avoid costly mistakes. So with that said, here are some characteristics of good investments to keep in mind:
- High probability of meeting financial goals
- Diversified portfolio to mitigate risk
- Resistant to trends and hype
It’s essential to learn about behavioral finance to become a wise investor. This will help you make sound decisions and avoid costly mistakes.
What is an ‘investment portfolio’?
When investing, choosing the right investment portfolio is crucial. An investment portfolio can include individual stocks, mutual funds, private equity funds, and other securities that are managed by a fund manager.
Stocks represent equity ownership in a company, while private equity funds pool money from multiple investors to make investments on their behalf.
On the other hand, mutual funds involve pooling money from multiple investors to purchase securities. These are then managed by portfolio managers.
When deciding on an investment portfolio, it’s super important that you carefully choose between an individual retirement account (IRA) and a standard brokerage account.
A brokerage account involves investing money through a financial institution’s brokerage service, while an IRA allows investors to manage their investments independently.
It’s important to understand the advantages and drawbacks of each option and invest in the one that best fits your financial goals and risk tolerance. By doing so, you can make informed decisions and ensure a healthy return on investment.
What’s a good portfolio mix to have?
A good portfolio is a balanced mix of various asset classes that allows you to achieve your income and asset goals.
A balanced portfolio involves asset allocation, which divides a portfolio among different assets, such as stocks, bonds, real estate, and cash. The process of diversifying a portfolio ensures that you’re not overly exposed to any one area of the market.
A diversified portfolio has the potential to provide returns from different asset classes that can be volatile or steady. It also helps reduce risk by spreading it across different asset types. Moreover, avoid gambling with your money and invest in securities that you fully understand.
9 Practical Steps to Get Started with Investing?
Investing for beginners can seem daunting, but with the right knowledge and approach, it’s possible to get started on the right foot. So that said, here are some practical steps to help you start investing:
Learn, Learn, Learn:
First, don’t put any money in the market and just learn about investing, particularly about the type of investment (stock, real estate, bonds, crypto, etc.) you want to make. Start with a book such as The Intelligent Investor to learn the ropes of investing. And then, move to other books, YouTube videos, notes, and even courses specific to the investment/security type you have an interest.
Set your investment goal:
Determine your financial situation and investment goals to establish the right mix of low-risk and high-risk investments. So diversify your investments to reduce risk and increase returns. Consider stocks, private equity funds, and stock market-related vehicles to ensure long-term savings and comfort during retirement.
Research investment options:
Make sure to thoroughly research the investment options available to find the one that suits your risk tolerance and investment goals. Furthermore, you can seek out mutual funds or ETFs to diversify your portfolio and opt for a low-cost index fund that tracks an index to minimize fees.
Choose an investment broker:
Consider the type of assets and fee structure the broker offers. Furthermore, look for a user-friendly platform for beginners and check the broker’s reputation with review websites like Trustpilot and Reddit.
Open a brokerage account:
Enter personal information, select the account type, and fund it using an EFT transfer, check, or wire transfer. Also, before paying anything, ensure the broker is a legit one by asking from FINRA.
Allocate your investment funds:
Choose well-diversified portfolios of stocks, bonds, finance, and other investments in different market segments and risk profiles. So research funds charge lower fees and focus on specific markets or sectors.
Monitor your investments:
Keep monitoring your investments and check the status of individual asset positions. Furthermore, use stock, bond, and other investment analysis tools to identify opportunities for portfolio diversification.
Rebalance your portfolio:
Adjust the proportion of different asset classes, such as stocks and bonds, to match your investment goals and risk tolerance.
Keep an eye on the Market:
Keep up with financial news and market analysis to learn about new investment opportunities and analyze the financial health of companies. It’s important to be aware of your portfolio’s value and sell stocks/assets that have lost significant value. Knowing the fair market value of stocks and the current standing of companies can help you decide when to sell stocks.
How do you measure and manage risk?
When investing, it’s crucial to consider risk management strategies in order to minimize potential losses. Here are some key strategies:
- Diversifying your investments is a good way to spread out risk across different asset classes. You can achieve this by investing in stocks, bonds, mutual funds, and private equity funds. It’s also worth considering adding commodities to your portfolio for further diversification.
- Historical data analysis can provide insights into an investment’s potential risk. This means researching past trends and patterns to help you take well-informed steps toward future investments.
- Incorporating risk management strategies into your financial plan can help you mitigate potential losses. This can involve setting up emergency funds or implementing stop-loss orders, which automatically sell an investment when it falls below a certain price.
- When making financial decisions, it’s important to consider your goals, risk tolerance, and time horizon. By doing this, you determine which investments are right for you and how much risk you’re comfortable taking on.
Seeking professional advice can be a valuable resource when making major finance and investment decisions. Financial advisors and investment professionals can provide guidance and help you navigate the complexities of the market.