Investing can be a complicated topic for people who are not in the financial industry. New investors are similar to travelers who are trying to plan their journey to a new place. There are many things that you would do before you plan a big trip, such as talking to other travelers, researching, reading about the destination, deciding what to bring and perhaps hiring a guide. Shouldn't you be as careful when it comes to investing your money?
15 Key Investment Tips
Keep these 15 tips in mind to get you started on the right path to investing wisely.
1. Seek Professional Guidance
It helps to have professional guidance in order to customize your investment strategy and to avoid making costly mistakes. There are many types of advisors that can offer assistance. Select someone who has the right expertise and builds a good rapport. Be sure to ask the financial advisor about their credentials and years of experience. Professionals that hold the title of Certified Financial Planner (CFP) have comprehensive training over a wide range of topics and have the highest ethical standards. A financial professional should take the time to review all your financial goals.
2. Ask Your Advisor About Fees
Most financial advisors earn some of their income in the form of fees or commissions based on the type of accounts they offer or the financial products that they sell. Be sure to ask your advisor how he or she charges for services. There may be fees for transactions or there may be a percentage charged based on the amount of assets that are being managed. This is an important factor because all fees will impact the growth of your investment.
3. Look for Guidance From Your Bank or Credit Union
It is best to get a referral from someone you who already knows you and is familiar with your financial status. If you have a good relationship with your local bank or credit union, use that as a starting place to find financial guidance. Most financial institutions have a full list of resources to offer as well as providing investment guidance. You can also get recommendations from your insurance representative or tax accountant.
4. Understand That Investing is Not Saving
Savings accounts earn a set rate of interest and do not place any risk on your balance. Investing is an important management of money for those long-term goals where you have at least ten years or longer for your money to grow. That long time horizon allows for the fluctuations that are bound to occur in the stock market. Keep money in a savings account for emergencies and short-term financial goals where you don't want to incur any risk.
5. Build an Adequate Savings Before Investing
It is essential to have a solid savings foundation for emergencies. An adequate savings amount should be able to cover your bills and expenses for 6 months or more. Accumulate your savings account before you invest because you may have to live off those resources during a change of career or extended illness. Savings should be held in a secure, guaranteed account with no investment risk.
6. Eliminate Credit Card Debt Before Investing
If you have a large amount of credit card debt, then the task of paying off that balance is a more immediate priority than investing. Credit card debt is important to eliminate because of the high interest rate and the negative impact it has on your credit rating. Prioritize any other debts (such as mortgages, student loans and car loans) as well.
7. Set a Time Horizon for Your Investment Goal
Investment goals should be set against a timeline. For example, if you are investing for retirement, you may have 20 or more years to reach that goal. On the other hand, saving for a car within three years is not an adequate time horizon to put that money at risk with an investment. Setting a time horizon will help to evaluate the investment along the way.
8. Diversify to Minimize Risk
Investment choices may include stocks, bonds, mutual funds, etc. Each investment choice has its own set of risks and rewards. It is best to create a mix of investments that will offer a more balanced approach. By holding a variety of domestic and foreign stocks, for example, you are less vulnerable to the weaknesses of one particular company. Additionally, not all investments move in the same direction so having a diversified approach will reduce some of the investment risk.
9. Practice With a Virtual Account
For first time investors, it may be difficult to get started. Consider joining an investment club where you are part of group discussions and you can learn by making decisions with the group. This is a fun and social way to learn about investing. There are also many virtual stock trading tools that allow you to take a step into the stock market with a hypothetical account before you put your real dollars into action. Check with brokerage trading companies such as Charles Schwab or Scottrade for their online tools.
10. Start With a Retirement Plan
Most employers offer a type of retirement plan, such as a 401(k), that allows you to participate by making small contributions from your paycheck. This is an excellent way to start investing because the employer may also contribute a percentage of matching funds to your account. Additionally, most retirement accounts are tax-deferred ways to invest. Review your retirement plan enrollment to explore the menu of investment choices. This is where a financial advisor can help you make the proper investment selection for your goals.
11. Invest Small Amounts to Start
Some investment accounts allow for small investment amounts, as low as $50, to be set up with a monthly automatic investing plan. Mutual funds are a great place for investing small amounts and many have low initial investment requirements. This is also a great way to start a college investment for a child that has over ten years for the investment to grow. The strategy is called dollar cost investing. By systematically adding a fixed amount to an investment account, you take away the market timing decision.
12. Be Patient With Market Fluctuations
Investments are not guaranteed and will go up and down in value. It is common to see stock markets move as much as two to five percent during a day. Of course, it would be great if the investment always went up in value, but it is important to be realistic. We can expect market cycles of growth and recession to occur every few years and need to accept that as part of the pattern of investing. It is best not to focus on trying to time market cycles, but to be consistent with investing over the long term.
13. Get Started Early in Life
Investing is a life lesson and getting started early in life opens the door to benefit from years of experience. Begin investing early in your working career by setting aside five to ten percent of your income to deposit into investments or retirement accounts. The advantage of starting early will magnify over time. Even a small amount will have the potential to grow and appreciate.
14. Get Your Children Involved
Start an investment for those education goals of your children. Begin this investment strategy when your children are young and they can learn about investing along with you. College investments can be started for a small amount and gifts from grandparents are a great way to fund a child's education plan. Some college investment plans offer tax advantages, such as 529 plans.
15. Monitor Your Progress
Any journey brings new experiences and that offers lessons. Just as a traveler reflects on what he or she has seen, an investor needs to review and reflect on investing decisions. If goals and needs change over time, such loss of job or a new baby in the family, these are reasons to review investments and update your status with your financial advisor. Investment accounts should be monitored for how they are performing and how well they fit into your current goals.
Preparing for the Future
Investing is an important strategy for building financial security and achieving long-term financial goals. Enjoy the journey and the learning experience of investing wisely.