Taking your first steps into the world of investing can feel a bit overwhelming. The sheer volume of available options, paired with the task of deciphering financial jargon, can obscure the fact that personal finance is exactly that—personal—and plans that work well for others might not serve your specific needs as effectively.
This simple four-step process can help you develop your own unique investing roadmap, build your investment IQ and confidence, and ensure that your investments match your objectives:
1. Understand your goals
Before you begin, take a solid look at your finances and determine how much money you have on-hand to fund your investment strategy.
Next, think about what you’d like to accomplish with the potential dividends from your investments and then divide that list into short, medium, and long-term time frames. For example, everyone should be investing for retirement, but what about covering the price tag of a wedding or a child’s education? Do you plan on buying or remodeling a home? How far down the road do you envision doing so?
Getting a better grasp on the basic outline of your own needs, wants, and personal timeline will inform your strategy going forward and allow you to set specific, more manageable goals, which you can share with an investment advisor who can help you work towards achieving them.
2. Create your investor profile
Just as you wouldn’t hammer in a screw, different goals require different types of investments. For example, aggressive investments such as stocks (also known as equities) carry high risk: One bad day in the market could net a $1,000 loss. Over the long-term, however, those willing to stay the course through sporadic ups and downs can earn higher returns on those riskier investments. On the other hand, with conservative investments -- such as bonds – you’re less likely to lose your original investment but also less likely to earn high returns.
For long-term goals more than 10 or 15 years away, aggressive investing is likely to pay off. For shorter-term goals, it’s wise to invest more conservatively. Most investors need a combination of aggressive and conservative investments, but each person must determine the right mix for them, based on age, salary expectations and goals.
3. Build your portfolio
Spend some time educating yourself about the different investment options: Stocks, bonds, and mutual funds all carry different pros and cons. Take advantage of the wealth of information available online designed to help you understand the difference between these options as well as the returns you can expect from each.
If you’d prefer to minimize risk when first building your portfolio, consider purchasing mutual funds or index funds rather than stocks. These funds, comprised of a mix of many different stocks, can bring a more well-rounded approach to your plan than investing solely in one company. As you build your portfolio over time, include a mix of diverse investments such as international, domestic, large-cap, and small-cap funds. By spreading your investments across many different categories, you’ll minimize the risk and potentially earn better returns.
4. Monitor your investment portfolio
Investing is most effective when viewed as a long-term venture. Take an active role in monitoring your strategy and keep track of how your investments are performing against your goals regularly. You may need to make adjustments periodically to keep your portfolio diversified. Resist the temptation to make knee-jerk adjustments when the market dips, though: Rather than selling investments at a loss when the market is down, consider taking the opportunity to purchase more shares at a discount. Historically, the market always recovers.
While investing can feel daunting to beginners, these steps can help you feel better prepared. If the investing landscape still feels murky to you, speak with a financial advisor who can help solidify your plan.