A Guide to Investing Money for the First Time
If you’re looking for foolproof ways to invest money and aren’t sure where to start, you’ve come to the right place!
Before you put your hard-earned cash into an investment vehicle, you’ll need a basic understanding of how to invest your money the right way.
Here are a couple of things you should keep in mind:
Creating Your Style
How much time do you want to put into investing your money?
The investing world has two major camps when it comes to the ways to invest money: active investing and passive investing. We believe both styles have merit, as long as you focus on the long term and aren't just looking for short-term gains. But your lifestyle, budget, risk tolerance, and interests might give you a preference for one type.
Active investing means taking time to research investments yourself and constructing and maintaining your portfolio on your own. If you plan to buy and sell individual stocks through an online broker, you're planning to be an active investor. To successfully be an active investor, you'll need three things:
Time: Active investing requires lots of homework. You'll need to research investment opportunities, conduct some basic analysis, and keep up with your investments after you buy them.
Knowledge: All the time in the world won't help if you don't know how to analyse investments and properly research stocks. You should at least be familiar with some of the basics of how to analyse stocks before you invest in them.
Desire: Many people simply don't want to spend hours on their investments. And since passive investments have historically produced strong returns, there's absolutely nothing wrong with this approach. Active investing certainly has the potential for superior returns, but you have to want to spend the time to get it right.
On the other hand, passive investing 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.
Your Budget
Question you should ask yourself: How much money do you have to invest?
You may think you need a large sum of money to start a portfolio, but you can begin investing with £100.
The amount of money you're starting with isn't the most important thing—it's making sure you're financially ready to invest and that you're investing money frequently over time.
One important step to take before investing is to establish an emergency fund. This is cash set aside in a form that makes it available for quick withdrawal. All investments, whether stocks, mutual funds, or real estate, have some level of risk, and you never want to find yourself forced to divest (or sell) these investments in a time of need. The emergency fund is your safety net to avoid this.
Most financial planners suggest an ideal amount for an emergency fund is enough to cover six months' worth of expenses. While this is certainly a good target, you don't need this much set aside before you can invest—the point is that you just don't want to have to sell your investments every time you get a flat tire or have some other unforeseen expense pop up.
Your Risk Tolerance
Question you should ask yourself: How much financial risk are you willing to take?
Not all investments are successful. Each type of investment has its own level of risk—but this risk is often correlated with returns. It’s important to find a balance between maximizing the returns on your money and finding a risk level you are comfortable with.
For example, bonds 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.
To learn more about investments, check out “Quality First Investments” by Bjorn Fahlen.
In his book, Bjorn Fahlen shares tips and insights for new investors who want to learn the tricks of the trade. From making your first deal to how to tackle tough situations, the book offers everything new businesspeople are looking for!
The book is available on Amazon.
