I never knew about investing until three years ago when I opened my ROTH IRA account. Finance terms such as compound interest, ROI, stocks, index funds, mutual funds ~ they all seemed very foreign to me. To learn more, I began reading personal finance books, watched videos and educated myself about money.
Read: Top 5 Books about Investing/ Personal Finance
I became very interested in investing because I have always liked the idea of saving money. However, I realized over the years, and also the hard way, that saving money alone is not enough to gain financial freedom. Saving your money is safe and has very little to no risk. However, due to inflation, you really are losing money over time by doing this. Investment provides better returns for your money.
An investment is an asset or item that is purchased with the hope that it will generate income or appreciate in value at some point in the future. In short, it’s saving your money AND watching it grow.
Some rules I found to be very helpful as new investor are:
1. Never Invest on Something You Don’t Understand.
Invest in what you know. A good investor is someone who analyzes the market before they invest. They look at growth trends, debt to equity ratios, leadership effectiveness, long term stability and strength, price earning ratio etc.
Know your calculated risks: Everyone has a different risk tolerance and this is something you have to calculate for yourself depending on your financial goals. Taking calculated risks whenever you invest requires you to actually understand both the potential reward and the likelihood of loss on your investments. That means you need to know how the investment will make you money, whether the asset has a history of providing promised returns, and how losses could happen.
2. Invest Early and Consistently.
Two words: COMPOUND INTEREST. It works like magic. Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan. For example, you invested $10 and it gained $1 in interest after the first year, the next year you will gain interest on $11 and so on.
If you want to create wealth over time, you have to know your ROI (return of investment) and the time frame for how long you will be investing for. Maximizing these two factors will maximize your returns.
If you have luxury of automating contributions to your investment accounts, do it. If you want to build wealth from your investment, you have to do it consistently. A regular investment strategy not only helps to remove the emotional aspect of investing, but also enforces discipline.
“Do not keep all your eggs in the same basket.”
Diversify your portfolio. When you put all of your assets into one investment – such as a single stock, mutual fund, or piece of real estate – you have the chance for high risk and high reward If the only stock you invested on started performing bad, it can easily destroy your wealth.
To reduce the likelihood of big losses, spread your money around a mix of different assets.
I invest on mutual funds, bonds, index funds, cryptocurrency (yes, I know it’s higher risk), and pretty soon, real estate.
4. Don’t Invest Money You’ll Need Right Away
While investing is essential, you don’t want to invest every spare dollar. You also need accessible cash. You need a fund you can tap into when an emergency happens. You also need to rid most of your debts including credit card debt. My rule for myself is to only INVEST MONEY THAT IS A “SURPLUS”.
5. Think Long term, unless you’re a Day Trader
Time is your ally.
Investing is a proven strategy to build long-term wealth for a secured future through systematic planning and smart decisions. Do not expect to make money over night. If you want to build wealth through stocks, then you need to think long term. Most of the stocks take at least two to three years time frame to give good returns to their shareholders.
6. Don’t let emotions guide your investment decisions
Don’t get affected by short term fluctuations of the market. Remember, you are in this for the LONG TERM goals. The stock market works on GREED and FEAR. people sentiments run the market. The news, politics, twitter posts, international relations all affect the stock prices. Ignore these short-term fluctuations and minor setbacks.
7. Look at fees and taxes
Remember, you have to pay the brokerage (and many other expenses) on both sides of the transaction, i.e. when you’re buying or selling stocks. To be a good investor, you have to keep in mind taxes and fees you have to pay with your investments.
Remember, investing is both simple and hard.
But you don’t have to be a financial expert to do it. Invest what you can and when you can.