Investment markets provide opportunities for people to buy and sell shares (pieces of ownership) of companies or bonds, with the hope that you will experience an exponentially increasing return over time.
Your best option for How2Invest is probably through mutual funds; creating a diversified portfolio takes more time and work than is available through individual stocks.
Identify Your Goals
Step one in investing is identifying your goals and when they want to be reached. Next, divide these into categories such as wants versus needs (a new boat being one such want, while funding a child’s college tuition being another need). Doing this helps determine how much risk is acceptable when investing and may impact what types of investments you choose.
If your investment goal is long-term such as retirement, taking on more risk can be more acceptable since there will be plenty of time to ride out market fluctuations. That may mean selecting stocks over bonds. While individual stocks and building a diversified portfolio can be costly, index funds offer cost-effective diversification solutions with similar diversification results. The key is starting early and investing regularly even if it means starting small amounts each month.
Determine Your Risk Tolerance
Your risk tolerance, along with your investing time horizon and financial goals, is an integral component of forming an investment plan. Your ability to withstand losses depends upon both how comfortable you are with market volatility and remaining invested through any drops in value.
Investors should review their risk tolerance at least annually, or more frequently as market fluctuations and personal events may alter it over time. Your risk tolerance could change with spending money you need for immediate spending versus savings accumulating towards retirement that are years away. To preserve wealth, lower-risk investments such as cash or money market funds with limited potential gains but typically lower returns are recommended; otherwise consult a financial professional who can assist in establishing your individual risk profile and creating an investment strategy to fit.
Determine Your Time Frame
Time until your money needs to be returned can play an essential role in choosing investments. If investing for less than two years, select safe assets which do not fluctuate much and offer low rates of return.
If your goal is retirement or home purchase, investing to reach it early offers more room for risky, high-return investments with volatile prices. An extended time horizon also helps weather market fluctuations so profits outstrip losses you might suffer.
Your willingness and ability to bear loss may differ depending on your time horizon, making it essential that both are identified before making investment decisions. An impartial third-party can assess your risk tolerance and select an investment mix best suited to your goals and financial situation.
Determine Your Knowledge of Investing
Investing successfully requires time, knowledge and skill. Beginning investors may discover they need more education before feeling ready to invest their own funds.
Conducting an investing basics quiz is an excellent way to assess how well-versed in investing you are. Many Americans with more investment experience or who own their own stocks typically possess greater investing knowledge.
However, even experienced investors can make costly errors that cost them dearly. Rushing into aggressive investing strategies that promise big returns can be disastrously detrimental.
In order to hone your investing skills without risking real money, try managing a virtual portfolio through a brokerage account until you feel confident enough to invest your own money. This enables you to learn from mistakes without losing money while simultaneously building up a diversified portfolio that may stand the test of time. Managing such an account also prevents temptation from following short-term trends in investing that may prove unwise in the long run.