One of the more advanced concepts in personal finance would be dealing with investments . You have to learn how to invest properly so that you will have enough money when the time comes for you to retire. Investment means making your money earn more for you. You should not try to invest when you still have no control over the simpler aspects of your finances. You will only find yourself in deeper trouble if you try to do that.
We have a few key concepts here in connection with how you can start on investments. These ideas are all very basic but like with everything else, you have to start at some point.
Know Your Timeline
When you want to get started investing you have to determine your timeline. Why are you investing at all? Do you need some extra money that you can use for your expenses? Do you want to have money when you retire? There are various reasons for investing and each reason would have a different timeline. If you just want some extra spending money then you will have a short timeline. If you need money for your retirement then the timeline for your investment can be 20 to 30 years from now. For short timelines, it is better to go for safe investments, but for ones with timelines longer than 5 years you can go for stocks.
Have a Plan
Once you have a timeline for your investment, your next move would be to create a plan that you can follow. A written investment plan is called an Investment Policy Statement or IPS. The IPS will make it clear what your goals are when it comes to investment and how you will be achieving those goals. The plan will state the amount that you need to get back from your investments and when you will need it all back. By making it clear how much return you need, you can figure out the amount of risk that you can take with your investments. Remember that investment is all about risks. There is always the chance that you will lose your money. It is important that you know the amount of risk that you can take.
Know Your Risk Tolerance
We have mentioned risk in investments. You have to get used to the idea that you will be facing risks when you go out to invest. You have to identify your risk tolerance if you want to go and learn how to invest your money. You need to identify your investing comfort zone. Your comfort zone is a portfolio that contains investments that are in line with your goals, timelines and risk tolerance. However, you can still invest even if you are not a risk taker.
The secret to investment is having a diversified portfolio. That means you do not put all of your money in one kind of investment only and by doing that it will lessen the risk of losing your money. On the average you will also get higher returns if you have a diversified portfolio.
As you become more experienced when it comes to investments, you would realize that different forms of investments would have different characteristics. In the long run you need to find the kind of investments that are far more tax efficient than others. The gains of some investments would be taxed as regular income. Others on the other hand, such municipal bonds are far more tax efficient.
Rebalancing is the process of realigning the mix of your portfolio. You should do this once a year so that all your investments would always be in line with your goals and your interest. This is simply done by selling off some of your investments that are not on the same line with your goals and buying new ones.
The Different Investment Vehicles
Now that you are aware of what your goals are and what you need to do in order to attain your investment aims, your next step would be to discover the kind of investment vehicle that you would like to use. If you are still unclear as to what kind of investment you would like to use then this is what you need to find out first.
The first thing that would come to mind of most people when they think about investments would be stocks. Stocks are shares in the ownership of a public company. It is a share on the assets that are owned by that company. The value of stocks is derived from public perception. That means the worth of a stock comes from how the public sees it. The price of a stock goes up when more people are interested in buying that particular stock than in selling it. When the opposite happens then the price of that stock would go down. There are many ways of dealing with stocks. You have to familiarize yourself with the various options before engaging in stock investments.
Bonds on the other hand, can be considered to be an IOU. When you purchase a bond, you are lending money to the institution that issued it. The principal or the institution that issued the bond would agree to pay you back at the end of the loan including the interest. The longer the period before the payback, the higher the returns that you can expect. But a longer time period will also expose you to a greater amount of risk. Bonds can be a great way of investing your money if you do not need your money after a short period.
Another form of investment that you need to look into would be the commodities market. This might sound like a complicated form of investment but it really isn’t. Commodities deal with a form of investment in products and things that people need and use. The most common example of commodities would be agricultural products. People trade in commodities by buying futures. Futures is the agreement to buy a certain commodity at a certain price in the future. The buyer of the future hopes that the price of the commodity will be higher than the agreed price.
Property investment is another form of investment that you should try to learn. It is a bit riskier, but it can also offer huge returns. There are several ways that you can invest in real estate. You can buy a house and then offer it for rent. You can also decide to buy homes and then flip them which is to sell them again for profit. The amount of returns from such an investment can be huge, but the risk of losing money is also big.
Buying Low and Selling High
One of the most basic lessons when it comes to investments that you need to learn is that you have to buy low and sell high. If you do not do that, you are going to lose money for sure. You need to know if the investments that you will be buying have the right value to it. There are many scams out there and you might end up paying more for something that is really not worth it.
Investment can be a tricky business, but you need to learn it if you want to be financially stable in the years to come. You cannot rely on your savings alone because that wouldn’t be enough. You have to learn how to face the risks and invest properly.