Investment can be a challenging endeavor. It’s not even people’s fault that have this perception, as many educational systems completely ignore finance even on the personal level. Some lucky few had the privilege of learning about the value of saving and investing from home. Of those few, even fewer had parents that were portfolio managers that could actually give them any valuable insight into personal investment. But who needs parents or school to teach you things when you have the internet.
This article will give you a few tips that most beginner investors should know and hopefully put you on the path of reaching personal financial goals.
- Start Early
Start saving as soon as you can. Legendary hedge fund manager Warren Buffet started his personal wealth portfolio right after high school and filed his first income tax return at 14. Usually the longer you are investing for, the better the returns. You don’t need to have access to institutional level investment to save either, millionaire Mark Cuban says you should buy a years’ worth of toothpaste when its 50% off. Just one tube won’t make much of a difference, but over a year’s supply, it will inevitably give you some budget breathing room. That idea can be transferred further into savings and investment, try to get the best conditions possible no matter which way you choose to save or invest.
- Delay Gratification
If you’ve been perusing the investment forums, blogs and websites you might have heard about a little thing called traders psychology. If you weren’t distracted by a sponsored ad about “30 of the most expensive cat breeds” then you might have noticed a common thread running through most articles dealing with trader’s psychology – discipline. Even if you prefer safer investments or even out-and-out savings, self-control is extremely important. You might have heard of the “marshmallow experiment”. This will make sense in a second – basically in the 1960s a Stanford professor sat children in front of a plate with a single marshmallow. They were told they could eat that marshmallow immediately or wait for a little and receive two. Then the person administering the test, left the room. The researchers then followed the children and found those that could delay gratification (and receive the second marshmallow) actually did better later in life. Delaying gratification, is an extremely valuable asset (no pun intended) for people investing and saving. You might really want that new bigger TV but you would have much more fun with a boat – which will have to save longer to purchase. Maybe that wasn’t an amazing example but you get what I’m trying to say.
- Have a Plan
What are your investment goals? By when you would like to reach that goal? Increasing you net worth is a deliberate and strategic process – here is an example: government bonds are low yield but stable, more aggressive investment types can have higher yield, but are also much riskier. Not having a plan or not adhering to it can cause you to hold on to a damaging investment in the hopes that will recover, even though your strategy might have defined selling of the instrument at a specific price level.
- What are your investment options?
The most straightforward approach to investing, is putting aside a percentage of your income that isn’t necessary for everyday living costs, usually in a savings account. This traditionalist stance is safe but as an investment model might not create significant interest, those assets could create more income using a different type of investment. There is a myriad of investment options from online Forex trading to the aforementioned government bonds. Of course, the best tactic is to speak with a licensed and professional financial advisor.
- Diversify its important
Don’t put all of your eggs in one basket – because if you stumble and drop them, most of them will break. This is something that even professional traders use, investing in more aggressive instruments while counterbalancing their risk with safer investments. Many financial advisors recommend having a mix of investment types including stock, bonds and other types of asset classes depending on your investment goals. The ratio of investment instruments you use depends on how conservative and risk averse you are or aggressive with higher risk appetite.
- Knowledge is a Risk management tool
Investment accounts are complex financial services involving rising asset valuations, regular contributions and compound interest. To add to these complexities frequently the instruments these accounts invest in are complex derivatives such as options, futures, forwards and others. Not only should you be familiar with these products but you should also be aware of the markets you are invested in. Becoming an investor requires you to study and follow the markets and learning as much as you can.
- Know your tax code
Being aware of your country’s tax code will help you to avoid paying unnecessary taxes on your capital gains. Most tax codes allow for certain tax leniencies and deductions – like 401Ks in the United States – where the income set aside in the retirement fund isn’t taxed but is taxed when it is withdrawn during retirement. Another reason you should know your country’s tax code? To avoid unnecessary, lengthy audits and expensive fines.
- Long-term mentality
The is a reason why patience is a virtue. Because the shorter the timeframe you seek to reach your investment goals, the more aggressive your strategy will have to be. This means your exposure to the market and of course risk will have to be exponentially higher. Although everybody thinks Warren Buffet was born wealthy, but as I mentioned before the truth is that Buffet started his investment career when he was 14, by buying land which he leased to a tenant farmer. A long-term strategy will give you an end point to strive to, hopefully mitigating the averse psychological effects of losing. Most people are life-long investors, which is of course the longest of investment strategies.