First of all, I’m glad that you’ve decided to take this first step on investing your money. The journey of a thousand mile begins with a single step and this first step is one of the most reliable ways to create wealth over time.
If you’re a first-time investor, you have come to the right place. Before you put your hard-earned money into investments, I want to walk you through some of the basics of how to invest your money.
There’s no one-size-fits-all solution when it comes to investing but the best way to invest your money is one that fits your personality, based on:
1) your investment style
2) your budget and cash flow as well as;
3) your expected return and risk appetite.
1) Investment Style
There are typically two investment styles that one can take, as 1) active investor or 2) passive investing.
This is most likely driven by your personal lifestyle – whether you have the time and resources to spend on research. Typically, someone who has a busy work schedule would opt for passive investment.
This is because as an active investor, it means taking time to research the investments that you are planning.
You would also have to build up and maintain the portfolio on your own. Adjustments would have to be made whenever there is a large swing in price movements.
With online brokers nowadays, this makes active investing an attractive proposition as most people can easily buy and sell in the comfort of their home.
However, a fair warning must given to those who are looking for active investing. There is a danger between knowing what you are investing in and simply following the next hot investment.
For you to be successful at active investing, you will need to invest not only your money, but 1) time, 2) research for knowledge, and 3) put in the interest.
As for passive investment, it simply involves putting your money into investment vehicles that are run by someone else.
Instead of doing the hard work on your own, someone else will take the responsibility to run it for you.
Mutual fund investing is one of the examples that people go for in passive investment. You could also hire a financial advisor or investment advisor to manage your investments.
You may find out more here: Investment for beginner
2) Budget and Cashflow
You don’t need a large sum of money to get started investing. Some people get started with just US$100, some others at US$1,000 while there are also those who invest US$10,000 and above when they first start.
The point is, it varies between individuals but what is important is to make sure that you have the budget and cash flow set aside for investments.
One of the first steps is to ensure that you have set aside a certain budget for emergency funds, as my colleague Tim Phillips outlined in “5 Golden Rules to Follow Before You Invest”.
This is to avoid finding yourself in a situation where you are forced to divest and sell your investments at a loss due to the need for a quick withdrawal of cash.
All investments come with a certain degree of risk and with the emergency fund, you will have built up your first safety net.
It is also important to plan your investment budget and the frequency of your investments. We’ve talked about one of the strategies, known as “dollar cost averaging” or “DCA” in financial terms, back in February this year here.
This is one of the ways where you can consistently invest smaller amounts of money on a regular basis.
So, instead of buying US$10,000 worth of shares in one lump sum, you can consider US$1,000 worth of shares every month for 10 months. The bottom line is that it’s important to plan your investment budget and cash flow.
3) Expected return and Risk Appetite
Understanding investment risk is fundamental to how to start investing. It helps you to set a realistic expectation of your return as well as to effectively manage your portfolio.
For example, a portfolio that consists of all equities/stocks presents both higher risk and higher potential return.
Meanwhile, bonds offer predictable returns with very low risk but its return yield is also relatively lower.
To put into perspective, investment into the US stock market generates an average return of 9 to 10% every year while US bonds offer a yield of around 2 to 3%.
I hope that these guides help to put you in the right state of mind to start investing. Forget about the noise and get-rich-quick scheme in the market.
Investment is about building your wealth sustainability over time. Trust the process.
