Before we get started, Congratulations! you are definitely on your way of becoming financially independent and taking control of your finance!
By now you have most probably gone through our guides on how to become financially independent and create your financial plan. if not, be sure to check them out as it will lay the grounds for what’s ahead.
So, it’s about time we start investing! there is no doubt that Investing your money is the most reliable way to build wealth over time. whether it’s your first time investing, or you have done it before, we’re here to help you get started.
It’s time to make your money work for you.
It is critical that before you open an investment account and start putting your hard-earned cash into an investment product, you get a basic understanding of how you should invest in the right way.
although there are more than a few investing methods and styles, there’s no one-size-fits-all answer here. The best way to invest your money in whichever way works best for you. in order to figure out what works best for you and can get you the best results there are a few questions that you need to ask yourself first:
- What is your investing style?
- What is your budget?
- What is your risk tolerance?
1. Your investing style – how much time do you have to invest?
It can be generally said that the investing world has two major sides when it comes to the ways to invest money: active investing and passive investing.
Although it is true that both styles have advantages, as long as you focus on the long term and aren’t just looking for short-term gains (which is more trading then investing and thus includes a lot more risk and management). But your lifestyle, budget, and risk tolerance might definitely give you a preference for one type.
every person has its own, unique, investment style, find yours!
Active V.s Passive investing, what is right for you?
active investing just means taking the time to research investments yourself and construct and maintain your portfolio on your own on a regular basis.
If you plan to buy and sell individual stocks on a regular basis through an online broker, you’re probably planning to be an active investor.
To successfully be an active investor, you’ll need three things:
- Time: Active investing requires lots of time. You’ll need to research investment opportunities, conduct basic analysis, and maintain and keep up with your investments after you buy them and know when to buy or sell them so you not lose profitable market conditions..
- Knowledge: All the time in the world won’t help if you don’t know how to analyze investments and properly research stocks. You should at least be familiar with some of the basics of how to analyze stocks before you invest in them.
to understand better how to pick your investments and analyze them properly, check out our guide on How to research an investment.
- is it for you?: Many people simply don’t want to spend hours on their investment portfolio. And since passive investments have historically produced strong returns, there’s absolutely nothing wrong with this approach. Active investing certainly has the potential for better returns, but you have to want to spend the time to get it just perfect, as we said, it’s not for everyone.
passive investing, on the other hand, is the equivalent of putting an airplane on autopilot versus flying it manually. You’ll still get good results over the long run, and the effort required is far less. In a nutshell, passive investing involves putting your money to work in investment vehicles where someone else is doing the hard work — mutual fund investing is an example of this strategy. Or you could use a hybrid approach. For example, you could hire a financial or investment advisor — or use a robo-advisor to construct and implement an investment strategy on your behalf.
a simpler, more predictable, and more stable approach
- Hands-off (launch and forget)
- Moderate returns (conservative and relatively less risk)
- Tax advantages
More work, more risk, and more potential reward
- You do the investing yourself (or through a portfolio manager)
- Lots of research
- Potential for huge, life-changing returns (but more risk involved)
2. Your budget – How much money do you are you planning to invest?
Unlike common belief, you can start investing with a relatively small amount.
You may think you might need a pretty large amount of money to start a portfolio, but the truth is that you can begin investing with just $100. Basically, The amount of money you’re starting with isn’t the most important thing , what is important is making sure you’re financially ready to invest and that you’re investing money frequently over time.
Do a breakdown of your liquid and free capital and ask yourself, how much of it you are willing to risk just to get started. it does not mean that it will be all you invest! you are just getting started and your initial investment is just your first step in setting up your portfolio. after the initial investment, it is quite easy and comfortable to make additional contributions to your investment account or better yet, use dollar-cost averaging and invest on regular dates of the month to cancel out high/low prices and receive a balanced cost ratio of your investments. (not to worry, on dollar cost avragin we will discuss in further guides and posts)
3. Your risk tolerance – How much financial risk are you comfortable with?
At this point it’s very important for me to try and clarify – Not all investments are successful! Each type of investment product carries its own level of risk, but this risk is often correlated with the level of expected returns. (usually the higher the risk, the higher the returns).
As a rule of thumb, it’s important to try and find a balance between maximizing the returns on your money and finding a risk level you are comfortable with.
This is also true regarding the different investment products you might choose:
Bonds for example offer predictable returns with very low risk, but they also yield relatively low returns of around 2-3%. By contrast, stock returns can vary widely depending on the company and time frame, but the whole stock market on average returns almost 10% per year.
Even within the broad categories of stocks and bonds, there can be huge differences in risk. For example, a Treasury bond or AAA-rated corporate bond is a very low-risk investment, but these will likely have relatively low-interest rates. Savings accounts represent an even lower risk but offer a lower reward. On the other hand, a high-yield bond can produce greater income but will come with a greater risk of default. In the world of stocks, the difference in risk between blue-chip stocks like Apple (NASDAQ:AAPL) and penny stocks is enormous.
What should you invest your money in?
Here’s the tough question, and unfortunately there isn’t a perfect answer. The best type of investment depends on your investment goals. But based on the guidelines discussed above, you should be in a far better position to decide what you should invest in.
For example, if you have a relatively high-risk tolerance, as well as the time and desire to research individual stocks (and to learn how to do it right), that could be the best way to go. If you have a low-risk tolerance but want higher returns than you’d get from a savings account, bond investments (or bond funds) might be more appropriate.