19 Nov Seven Investment Tips for Beginners
Do you have money sitting in your bank account earning diddy squat?
Want to make your money work harder and you work smarter, not the other way around?
How do you decide the best investment plan that will grow your money into wealth for you?
There are many different ways to invest and choosing the right option can be difficult.
If you are looking to invest for the first time, keep these seven things in mind.
- Start with the End in Mind
You need to have a clear reason why you want to invest.
For example, do you want to save to buy your first home or for retirement? Your answer will have a huge difference in how you should invest your funds.
If you are looking to invest for a house deposit in two years, your investment options are going to be different compared to if you want to invest for your retirement in twenty years.
Be very clear about the purpose of your investment and what you want to achieve.
- Get Educated
There are a multitude of resources out there about different investment options.
Some tell you to invest in property.
Some tell you to invest in shares.
Some tell you to invest in bitcoin.
Some tell you not to invest at all!
While I would (vainly) suggest that you should only read articles from Master Your Money Now, I am the first to admit there are other finance experts out there who have a view that is just as qualified as mine.
The fact is there are many paths to Rome. What you (and your financial planner) should be figuring out is what works best for you.
Diversification means spreading your investments across more than one asset class.
In everyday language we refer to this as “not putting all of your eggs into the one basket”.
Think like a table. If a table only has one leg. If that leg falls over and the table will collapse.
But if your table has four, six or even eight legs and one of the legs falls over, that table will wobble but it will still stand.
Same with your investments.
If you invest in one asset, or one company (share), or one property, if that investment falls over, you satisfy the definition of screwed!
However, if you diversify across multiple asset classes, you are reducing risk and therefore maximising your returns.
- To Borrow or Not to Borrow
Borrowing, more commonly known as gearing, can be a great strategy to maximise your returns, but it also maximises your risk.
As an example, if you have $50,000 to invest and earned 10% on that investment, you make $5,000.
However, if you had borrowed another $50,000 to investment, you would have made $10,000 and thus had a 20% return on your original $50,000 investment.
The disadvantage of gearing that it doesn’t just maximise your returns, it also maximises your losses as well.
If that $50,000 investment lost 10%, you would lose $5,000. But if you had geared, you would have lost $10,000 or 20% of your original investment.
Gearing can be a great strategy for the right person and the right circumstances. However you have to be the right kind of investor as well. It comes down to your investment goals and are you a person who likes to take more risk than most. Speak to a financial planner before going down this path.
- Make Regular Contributions
I know of people who put in a big lump sum into the market just before the global financial crisis and lost big time!
If you have a big lump sum to invest, I would suggest a safer option would be to make regular contributions into the market across a long period of time.
If you did this during the global financial markets, you would have taken advantage of lower price and made some significant long term returns on your finances.
Finance nerds would call this strategy dollar cost averaging. I would simply refer to this as a basic investment tip!
- Have an Exit Plan
This ties in with point 1, but know when to quit.
Your investment timeframe is often a good place to start.
However, I would suggest a dollar amount is required as well.
For example if you wanted to save $50,000 for your house deposit for five years and you do it in two, why remain in investments which may lose money? Isn’t this just unnecessary risk to take?
I always say to my clients I don’t have a crystal ball. I don’t control the markets and I don’t know specifically what returns they will make.
Therefore I always ask my clients three questions before they invest:
– If your investments go up in value by 20 percent, what are you going to do?
– If your investments go down in value by 20 percent, what are you going to do?
– If your investment stays flat, what are you going to do?
It is better to ask and importantly answer these questions before entering any investments. If you have to make a decision in the “spur of the moment”, chances are it will be the wrong decision.
Have a clear exit plan which has both a time based objective and a dollar based objective.
- Work with a Financial Planner
If you have serious funds to invest and you haven’t invested before, I would strongly recommend not doing it yourself.
There are several great financial planners that can make this process so much easier for you.
If you don’t know where to start, or if you don’t have the time to do the necessary research, then engage a financial planner so they can reduce your risk and boost your returns.
You can lean on their expertise and experience and they can do the paperwork and administration on your behalf.
Some people say the cost of advice is expensive. If only they could see the cost of ignorance.
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Disclaimer: This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs.
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