If you are a beginner investor you are undoubtedly sick of being told to “just start investing”. That’s like telling me to just fix the transmission on my car. If we lack the knowledge and skills, just how are we supposed to start doing anything? Well, I can’t help you with your auto repair, but after you read this post you will absolutely be able to start investing. Let’s get to work.
1. Relax and Let Yourself Off The Hook
If you don’t have a lot of experience with investing you might feel bad about that but don’t. I happen to understand money and investments because it’s my profession but there are plenty of things you understand that I don’t. And as with anything worthwhile, it takes time and work to really get it.
But you don’t have to master this topic entirely before you start investing and the basics aren’t that complicated. Just take a deep breath, stop beating yourself up and get ready to take the next step.
2. Clarify Your Goals
Some people understand investments but they get lousy investment results anyway. Why? Because they don’t match their investment goals to the investments they make. They make long-term investments and expect short-term results. No Bueno. To avoid that happening to you it’s important to be clear on why you are investing.
- What are your goals?
- When do you want to achieve these goals?
- How much money will you need in order to accomplish your mission?
These are important questions to answer because they are the filter through which you make investment decisions. If you have long-term goals, you need to make long-term investments to match those goals. In addition, you must select the appropriate investment approach to balance your goals and comfort level. And your expectations have to be right-sized too.
3. How It Works
Your next move is to understand how bonds and stocks work. Bonds are loans. When you buy a bond (or buy a bond fund) you loan your money to the organization which took the debt. They pay you interest every six months and at the end of the term they give you back the money you lent them. Just keep in mind that bonds fluctuate in value and if the borrower gets into bad financial shape and the issuer threatens default, you could lose a substantial part of your investment.
When you buy stocks you own a small percentage of the company which issued the stock. If the value of the company rises, the value of the stock goes up accordingly. Sadly, the inverse of this is also true. If the company gets into trouble, the value of your shares will probably drop.
Historically, if you look at 10-year periods, stocks do better than bonds. But that’s no guarantee of future results. And even if the stocks do better on average over a long period of time, it’s important to keep in mind that stocks are much more volatile than bonds generally speaking. Depending on what kind of stocks or stock funds you buy, you might be signing up for a very wild ride.
Study how these investments work. This is crucial because it will help prepare you for the both the good and bad times ahead. Again, investing is a long-term proposal. It’s important to understand the kind of risks and volatility you may experience before you get into the boat. This way, you won’t jump overboard at the first sign of rough waters.
4. Set Yourself Up For Success
Before I invest for clients, I run a financial plan (which you can even do yourself without paying anyone). This is important because certain financial road bumps can easily knock you right out of your investment plan if left unaddressed.
Among other things, your plan should look at your current spending and compare it to your income. This will help you figure out how much you can afford to save and invest each month. The plan will also help guide you by clarifying your financial goals and how best to achieve them.
5. Start Slowly
This may seem like a lot of new information to digest at one time but take it easy friend. You can either work with an advisor or do this yourself. If you prefer the later, open an account with a fund company or custodian broker and set up an auto investment plan.
For beginners I always suggest using funds or ETFs as they provide an inexpensive way to get a lot of diversification.
It’s not difficult to launch your investing career. Start off with the proper mindset. Next, clarify your goals and take some time to familiarize yourself with how investments work and what to expect. Then sketch out a financial plan yourself or hire someone to do this for you. Once you take these steps you’ll be ready to start investing. Just take it slowly until you get your feet wet and build up your comfort level.
What steps are you willing to take in order to start investing on the right foot?