There’s the cookie jar approach. You know, spare change, birthday money and other small sums of money that end up in your cookie jar. Before you know it, money will pile up to an amount you can utilize at your own discretion. That’s a bit too basic though, even if you’re a beginner.
Today’s blog will delve into the fascinating world of investment for beginners. The options are endless and as a novice, it’s understandable that you wouldn’t know where to begin. What industry, what instrument, what path do you go down in order to multiply your initial investment?
The variables for such a decision are countless, ranging from the level of risk tolerance you’re willing to take on and initial investment amount to how active and involved you want to be with the investment process. Just like a suit, investment approaches need to be tailored to individuals and situations.
The “off the shelf” approach is rarely a good idea. Just because AI or Cannabis are booming as industries and the investment world is buzzing about them as possible options, that does not mean it would be a good idea to put your money down and invest.
Read, research, investigate
The best way to start your investment journey is reading, researching and investigating. There’s no such thing as too much information when entering the world of investment. The more you know, the better you’re equipped to make a more informed decision.
Just think of it as any other decision you would make involving an amount of money. Buying a car, buying a house or choosing a university degree.
Would you ever make those decisions based on other people’s “advice” or current trends? Hopefully not. Go deep, do your own reading and don’t be afraid to reach out to people that have taken the plunge and are a few steps ahead of you in their investment journey.
We’re not really fond of quotes but in this case it seems appropriate and fitting to use this one by Benjamin Franklin: “If you fail to plan, you are planning to fail!”
It’s quite simple and not a groundbreaking idea but trust us when we say it can have groundbreaking results when implemented: planning. Take out a piece of paper (or most probably open a laptop or a tablet) and jolt down an action plan. The questions you should be asking yourself are again quite simple:
- Is this a long term or short term investment?
- Which industry fits my investment capital?
- Do I have inherent knowledge on an industry/product that can give me a head start?
- Who should I be reaching out for help?
- Do I have a backup plan? How am I going to adjust if things don’t go my way once things are up and running?
The most common mistake with planning is that most people see it as something you do prior to an action. Once the planned action commences, planning goes out of the window. Planning should follow the entire life-cycle of an action. Investing is a highly volatile undertaking and any planning that happens before you start investing will definitely need adjustment.
The most important aspect of planning is being diligent and objective enough to follow through and calibrate based on new data.
Have enough cash
How much is enough though? Is there a magic number, a threshold you need to reach in order to know that you’re ready to enter the investment world? The answer, as you would expect, is not a simple yes or no.
There is no magic number. Each and every person lives a different lifestyle, have different needs and different income. When it comes to investing, what you need to be mindful of is have enough savings to support you in a worst case scenario. A worst case scenario is one where for some reason your income is paused and you need to pay bills and expenses out of your savings.
Common sense dictates that those savings should be able to last you for 3-6 months, until you find a new way to earn income. Investment money should be an entirely separate amount and not affect your aforementioned savings. Money management is a teachable skill, a method that has a beginning, middle and ending with results that can be miraculous for your financial status.
Being able to identify you’re in the position to invest money might sound like a simple task but it’s much more challenging than one might think.
Invest in something you understand
This obviously comes back to the education and research point we made earlier but we want to emphasize the importance of understanding the types of investment you’re about to get involved with. When we talk about understanding we refer to striving to attain a level of comprehension that allows you to not only make an investment but also effectively manage it.
Let’s give an example. A 60-year old retired man wants to invest some of his pension fund money. For the sake of the example we will use two prospective investment routes: real estate and cryptocurrencies. Logic dictates that real estate is by nature a much simpler industry to comprehend and understand the minutiae in comparison to cryptocurrencies.
For someone that has never dealt with stocks and shares and tech, it would take a much longer adjustment period and learning curve to get accustomed to the terminologies and specifics of this industry in comparison to the much simpler offering of real estate.
The example is not used to discourage anyone from investing in the stock markets or cryptocurrencies but it’s rather used to emphasize that different investment routes apply to different investor profiles. The stage you are in life, your background and knowledge as well as your interests, might give you a head start in understanding an industry much better than others.
Keep your emotions in check
A lot has been written about emotional investing and we urge you to read as much of the available literature as possible. Why? Because when it comes to investing, emotions can either make you or break you.
Entering the world of investment you need to be both prepared and willing to part ways with your invested capital. Yes, you heard right. Nobody wants to hear that and that is not the reason anyone enters the investment world. On the contrary, the sole reason someone wants to invest in stock, corporate bonds or any types of assets, is to see their initial investment grow and multiply.
Failure and loss are one of the possible outcomes though and you not only need to be aware of it, you need to be prepared to deal with it if and when it comes. Some of the most brilliant minds in the world of investment have rolled the dice and lost.
People like Warren Buffet and Peter Lynch have admitted that no matter how much experience or knowledge one might gain when investing, there will be a time when the market will beat you. This is exactly the point where you need to keep your emotions in check.
Mistakes or bad choices are nothing but lessons you need to build on and incorporate in your planning moving forward. More often than not when an investment goes bad, investment beginners tend to panic and seek to win that money back. As you can imagine, when decisions are clouded by emotions, they rarely have a desirable outcome.
Be calm, collected and ready to manage the impact of bad investments when they do happen. Try and get to the root of the problem and unearth the reasons that led to failure.
Remember the planning tip on our list? Now is the time to revisit it and add your newfound knowledge on that plan. You might have seemingly taken a hit financially but you are now more experienced and knowledgeable to deal with what’s coming next.
This is the investment tip you’ll probably find on every single list with investment tips on the web: don’t put all your eggs in one basket. Spread your investment across different asset classes and at the same time see your risk levels decrease.
As a rule of thumb, an investment in a diversified portfolio gains value over a time period of 5 years. If your intentions or capabilities fall well under that time period, it would be much wiser to keep your funds in a savings account and profit off the interest rates.
Be careful of advice
Advice is a sensitive subject when it comes to investment. Fraud and ulterior motives are always factors you should consider when getting advice from third parties. This is exactly why you need to be as educated as possible on the industry you’re dealing with. Financial advisors, fund managers and other professionals are obviously the right way to go, but even then you should always remember that the person with the most responsibility about your decisions should be yourself.
Third-party advice should supplement your own thoughts, beliefs and assumptions and not be the primary factor in your decision-making.