Imagine this - you're at a party, and your friend starts discussing their new investment portfolio and other avenues they are looking into to invest and save. Meanwhile, you're just trying to figure out how to budget for rent and groceries without dipping into your emergency fund. It's a situation we've all found ourselves in at some point.
We've all been there. But here's the twist: investing isn't just for the finance nerds and rich folks. It's a world that's open to everyone, including you. You can join the conversation and learn a thing or 2 to help you make the right investment decisions.
In this blog, we will discuss the basics of investing and provide some fundamental insights. By the end, you'll feel empowered to make the right financial decisions for your future.
Investments are assets or items acquired to generate income or appreciation. In other words, investing means putting your money into something with the hope that it will grow in value over time.
This could be anything from stocks and bonds to real estate and mutual funds. An investor's various assets are called a portfolio.
Investing is crucial for several reasons.
Investing when you're young is one of the best ways to see solid returns on your money. This is due to compound earnings, where investment returns earn their return. Compounding allows your account balance to snowball over time. Even small amounts can grow significantly with the power of compounding.
How much you should invest depends on your financial situation, investment goals, and when you need to reach them. A common goal is retirement, where investing 10% to 15% of your income each year is recommended.
Calculate how much you need for other goals like buying a home or traveling, and work backward to determine your monthly or weekly contributions.
To start investing, you'll need an investment account. This can be done through a brokerage firm or a robo-advisor. Brokerage firms offer various investment options, while robo-advisors provide automated, low-cost investment management.
Your investment strategy involves deciding how to allocate your money across different types of investments, known as asset allocation. This strategy depends on your risk tolerance and investment goals.
Diversifying your investments can help manage risk and improve your chances of achieving your financial objectives.
Investments are grouped into categories known as asset classes:
Buying a stake in a company.
Savings you put in a bank or building society account.
Investing in physical buildings, whether commercial or residential.
IOUs given in return for loaning money to a company or government.
Spreading your money between these different asset classes can lower the risk of your overall portfolio underperforming.
Returns are the profit you earn from your investments. They can be realized in several ways, which include:
Payments from shares.
Income from properties.
Earnings from cash deposits and fixed-interest securities.
An instant-access cash account allows you to withdraw money whenever you like and is generally considered a secure investment.
However, money invested in fixed-interest securities, shares, or property will likely go up and down in value but should grow more over the longer term.
All investments carry some degree of risk. The more risk you take, the more you can earn or lose. Secure deposits like savings accounts risk losing value over time due to inflation.
Fixed-interest investments can suffer if interest rates increase. Stock market investments are expected to beat inflation and interest rates over time but can fluctuate.
Considering your comfort level with investment fluctuations and how much you can afford to lose while still meeting your goals is crucial. Good investing involves finding the right mix of investments that match your risk tolerance, known as asset allocation. Consulting with a regulated financial adviser can help tailor a plan to your financial goals.
Investing is a vital part of financial planning. Starting early, investing regularly, and diversifying your investments are critical strategies for building wealth. Understanding the basics of investing, including returns and risks, can help you make informed decisions and achieve your long-term financial goals.
