According to Cathy Curtis, a certified financial planner and the founder and CEO of Curtis Financial Planning in Oakland, California, investing is a fantastic method to increase wealth, but you have to be smart about it.
The desire to begin investing might be motivated by a variety of factors. With a specific objective in mind, such as your wedding in a few years or your child’s college education in the medium term, you could be aiming to increase your wealth or create a nest fund for retirement.
In addition to relieving your immediate and future financial concerns, a well-thought-out financial procedure also assists you in achieving your financial objectives. Below are 5 things you should know before you start investing.
5 things you should know before you start investing
Start investing as early as possible
One of the greatest ways to get good returns on your money is to invest when you’re young. Thanks to compound profits, your investment returns now begin to generate their own return. Your account balance might increase over time thanks to compounding.
At the same time, a lot of people ponder whether they can start off with not much cash. Simply put: Yes.
More than ever, investing with smaller sums of money is now possible because to low or no investment minimums, no fees, and fractional shares. Numerous investments, including mutual funds, exchange-traded funds, and index funds, are readily available for very small sums.
Create a blueprint for your personal finances.
If you’ve never created a financial plan before, take some time to sit down and honestly assess your current financial status before making any investment decisions.
Establishing your objectives and risk tolerance, either on your own or with the assistance of a financial expert, is the first step to effective investment. Your ability to profit from your investments is not certain.
However, if you are aware of the realities around investing and saving, and you follow through with a wise strategy, you should be able to achieve financial stability over time and profit from sound money management.
Learn how the investment market works
Read publications or enrol in short-term courses that cover contemporary financial concepts. The Nobel prizes awarded to the creators of ideas like portfolio optimization, diversification, and market efficiency were well-deserved. Financial basics are a blend of science and art in investing (qualitative factors).
It is important to start with the scientific foundation of finance since it is a good location to go from. Don’t worry if science isn’t your forte. There are several books that simplify complex financial concepts in a way that is easy to grasp, like Stocks For The Long Run by Jeremy Siegel.
Create a fund for emergencies.
An emergency fund is a money you set away for emergencies, as the name implies. It is the money you may turn to in times of need to cover unplanned and unanticipated costs like losing your primary employment, having a medical emergency, having a personal issue, or even having a car breakdown.
As a general guideline, you should first establish an emergency fund that is more than at least three times your monthly costs before you begin investing for your long-term objectives. Put this cash aside in a different account. Read more here.
Diversification is the practice of building a portfolio that includes a wide range of assets from various asset types. This reduces your exposure to any one asset and, thus, to any specific dangers.
Building your portfolio with stocks and bonds from various, unrelated industries and regions is an example of a diversification approach. This way, if one investment has a downturn, your entire portfolio won’t be negatively impacted.
For instance, U.S. government bonds were able to produce gains during the Global Financial Crisis of 2008, when stock markets elsewhere saw a severe correction. The next year, however, U.S. government bonds underperformed, particularly in comparison to equities markets and many other important asset classes.
Your age should be equivalent to your bond allocation, according to a general guideline used by William Bernstein, author of The Investor’s Manifesto when determining a stock-bond ratio. A 50/50 or 60/40 split is a fine place to start, he advised, but after that, you should determine your risk tolerance and adjust your portfolio accordingly.