Starting your journey into the world of investing can be both exciting and overwhelming and although anyone can benefit from investing with a little understanding, it´s something often shied away from because of nothing more than a lack of understanding. Before diving in, it’s crucial to ensure that your finances are in order and that you have a clear understanding of your investment goals and risk tolerance. In this guide we will help you navigate some of the essential steps to consider before making your first investment, ensuring that you are well-prepared and confident in your decisions.
In this article I will explain…
- What to think about before you start investing
- How to review your personal financial situation
- Deciding how much to invest
- A summary of some of the most popular forms of investment
- Trading vs Investing
- The importance of having a plan
- How to diversify and reduce your risk
- How to get started investing in the stock market
- Why you should not trust anything I write
- Other things to consider
Assessing Your Financial Readiness
Before diving into the world of investments, it’s crucial to evaluate your financial situation. This ensures that you are making informed decisions without jeopardising your financial stability. Here are some key steps to assess your financial readiness: (and if you like this please sign up for my free newsletter with periodic summaries of new posts).
Importance of an Emergency Fund
Having an emergency fund is essential. This fund should cover a few months’ worth of major expenses, such as mortgage or rent payments and other essential bills. This financial cushion helps you cope with life’s ups and downs without needing to dip into your investments. As a general rule, aim for three to six months of your salary available with high liquidity (We will talk more about liquidity in another article). Having funds available doesn´t mean that they have to be in a standard non-interest bearing bank account – there are always ways to keep some liquid funds that are still working for you and growing little by little behind the scenes.
Building an emergency fund gives you the confidence to handle unexpected financial emergencies, like sudden car repairs or medical bills, before you start investing.
Clearing High-Interest Debts
Before you start investing, it’s wise to pay off any high-interest debts you have. Interest and charges can mount up fast if the balance isn’t paid off, and are likely to exceed any investment returns that you make. Financial planners typically recommend paying down high-interest debts, such as credit card balances, first. This is because the returns from investing in stocks are unlikely to outweigh the costs of high interest accumulating on these debts. It´s probably not a good idea to be investing $100 (or whatever currency you are in) a month into the stock market which (may, for example) return you 8% a year whilst you are paying the minimum payment on a credit card that is charging you (for example) 20% a year!
I am not a financial advisor and this article is not intended to give advice but it´s worth pointing out that if you do have loans, credit card balances and so on, you should be looking at the accounts and finding ways to reduce the amount of interest where possible so that you can clear the balances quicker. Sometimes you can take advantage of interest free balance transfers meaning that you can move the amount owed to somewhere else and then 100% of your contributions will be bringing down the balance, not paying interest to the bank!
Budgeting for Investments
Assuming you want to regularly save for the future then creating a budget is a vital step in determining how much you can afford to invest. Start by reviewing your income sources and expenses. A popular budgeting framework is the 50/30/20 rule:
1. 50% of your take-home pay should go towards must-have expenses like rent and transport.
2. 30% for fun, because you have to enjoy life.
3. 20% goes towards the future you – this includes investing and saving.
Consider using a budgeting template to make this process easier. This one is just a structure that some people use but you need to look at your own personal situation and work out what works for you. This will help you ensure that you are not dipping into funds you need for daily expenses and that you can invest comfortably over time. The key to investing is consistency – keeping those contributions going in whatever the markets are doing. With this in mind, it’s important to set yourself a target that you can achieve and where possible make the transfer as soon as you get paid rather than waiting until the end of the month.
It’s not uncommon to think “I can’t afford to invest” but even the smallest regular contribution into a solid investment plan can pay dividends (litereally) long term. So this is a good time to take a really deep look at your finances, what can be changed and how you can free up more to invest. This is also something we will look at in a future article so please, do sign up to our free newsletter to receive periodic summaries of the new articles that are published.
Don´t invest more than you can afford to loose, at least in the short term
One of the main reasons that people get nervous when they invest is because they are investing more than they can afford to lose. As we develop this site we will look more and more into investment strategies because nobody wants to invest and lose money but it’s important that you understand right from the outset that any type of investment can go up as well as down. Markets in general fluctuate, they crash, businesses go through tough times and so whenever you invest you need to be ready for this. In the majority of cases, if you have done your research and invested in a solid way, investments generally go up over time (that’s a very general thing to say and many businesses do fail but in other articles we will look at how to manage that risk), but it´s a perfectly normal thing that along that journey they also go down so when you are investing you should not invest more than you can afford to loose in the short term. Always ensure that your financial commitments, living costs and funds for some day to day fun stuff are kept apart so that when you invest, if things start bouncing around you are comfortable and not needing the money. Panic selling is one of the fastest ways that retail investors (normal folk like you and me) loose money – whilst the big boys and girls linger waiting for that cheap stock you are offloading so that they can buy in at good value and wait for it to rise.
Setting Clear Investment Goals
Short-Term vs Long-Term Goals
When you start investing, it’s important to think about both short-term and long-term goals. Short-term goals might include saving for a holiday or a new car, while long-term goals could be about securing a comfortable retirement or funding your child’s education. Having a clear goal and timeline in mind helps you create a realistic plan for your investments.
Common Financial Goals
Some common financial goals include:
· Retirement
· Emergency fund
· Family planning
· Education planning
· Major life events (e.g., wedding, holidays, new car etc)
Knowing your goals helps you understand what you need to achieve them financially.
Aligning Goals with Investment Strategy
Your investment strategy should match your goals. For example, if you have a long time before you need the money, you might choose more aggressive investments. On the other hand, if you need the money soon, safer investments might be better. Regularly review and adjust your goals as your life changes. This ongoing process ensures that your investment strategy remains aligned with your objectives.
To give a brief example of this, if you are young and want to invest for your retirement then you may choose to put your money into equity investments (stocks and shares) and include some high growth sectors (for example technology) because your chosen strategy is to make the most of the way the sector is growing and you feel it will deliver good results in the short to mid term. But, high growth stock tends to be volatile and also much more influenced by other factors so whilst it may generally be growing, often at rapid rates, it´s more susceptible to drops in the short term. This is why if your strategy is high growth to start, you may want to think about gradually rebalancing to a less volatile type of investment as you get closer to needing the money (retirement for example).
Tax – A vital consideration
I am not a tax advisor and never will give advice on tax because every country is different and everyone’s situation is different so if you are not tax savvy then you should get advice from a qualified tax advisor to help you with ensure that whatever investment strategy that you choose to pursue is done so in the most tax efficient way whilst at the same time being done correctly so that you are paying the correct amount that you should be.
Understanding Risk and Return
Risk Tolerance and Investment Choices
Before you start investing, it’s crucial to understand your risk tolerance. This means knowing how comfortable you are with the possibility of losing money. Some investments are riskier than others, and your comfort level will help you decide which ones to choose.
Balancing Risk and Potential Returns
When investing, you need to balance the risk with the potential returns. Higher returns often come with higher risks. It’s important to target a realistic rate of return and be wary of investments that promise too much. If it sounds too good to be true, it probably is.
Impact of Market Volatility
Market volatility refers to how much the value of investments can go up and down. Understanding this can help you prepare for the ups and downs of investing. Remember, the market can be unpredictable, and it’s essential to be ready for both gains and losses.
Choosing the Right Investment Vehicles
When you’re figuring out how to invest, picking the right investment vehicles is crucial. Different options come with their own risks and rewards, so it’s important to understand them before diving in.
Stocks vs Funds
Stocks represent ownership in a company. Yes, let me say that again – when you buy stocks (or shares as they are referred to also, depending on your location, you own a piece of that company. Now, if you are an average retail (private) investor the percentage of the company you own is likely to be extremely small but it is still important to take on that mindset. Don´t think of stocks and shares as just numbers on a chart, see it for what it is, an investment in a business. Take your time to learn about the business (again, worth signing up to the free newsletter because we will be covering this in a lot more detail over the coming weeks and months) and decide if you want to be a part of it and if you believe in their future. As a shareholder you may in some cases get voting rights so have an actual chance to make your voice heard over some of the core decisions, so it’s worth knowing what you are talking about and as well as crucial to enable you to know what you are investing in, it also makes your journey much more enjoyable!
Funds, on the other hand, pool money from many investors to buy a diversified portfolio of stocks, bonds, or other assets. This can help spread out risk. We will talk about ETF´s, (Exchange Traded Funds) in another article and why they may be the ideal choice for the average investor.
Understanding Bonds and Fixed Income
Bonds are loans you give to companies or governments in exchange for periodic interest payments and the return of the bond’s face value when it matures. They are generally considered safer than stocks but usually offer lower returns. Safer doesn’t mean that they don’t come without risks and you need to study very carefully what you are investing in but bonds are often government backed or backed by massive companies with outstanding credit ratings.
Exploring Alternative Investments
Alternative investments include things like real estate, commodities, and private equity. These can offer high returns but also come with higher risks. They are less liquid than stocks and bonds, meaning they can be harder to sell quickly if you need cash.
Before you start investing, you’ll want to understand your own tolerance for risk. This will help you choose the right mix of investment vehicles to meet your financial goals.
Building a Diversified Portfolio
Importance of Diversification
In an uncertain world, putting all your investment eggs in the same basket can be risky. Spreading your money across a range of different companies, asset types, and geographical areas will reduce your reliance on any one to perform. So if some of your investments perform poorly and make a loss, your other investments might not. Therefore, many people choose to invest in a fund – where an investment manager will choose which assets to invest in on your behalf or where they track an index of companies such as the S&P 500 which tracks the performance of the 500 biggest companies in the USA at any given point in time.
Asset Allocation Strategies
Asset allocation is about deciding how to spread your investments across different asset classes, such as stocks, bonds, and real estate. A balanced approach might look like this:
| Asset Class | Percentage Allocation |
| Stocks | 50% |
| Bonds | 30% |
| Real Estate | 10% |
| Cash | 10% |
This table is just an example. Your allocation should reflect your risk tolerance and investment goals.
Rebalancing Your Portfolio
Over time, the value of your investments will change, and your portfolio may become unbalanced. Rebalancing involves adjusting your investments to return to your original asset allocation. This might mean selling some assets and buying others. Regular rebalancing helps you maintain your desired level of risk and ensures that your portfolio remains aligned with your financial goals.
Remember, investing should not be viewed as a short-term solution to a problem. Investing over a timeframe of at least five years can give your investment more opportunity to ride out any short-term performance dips.
Getting Started with Stock Market Investments
Basics of Stock Market Investing
Starting to invest in the stock market can seem daunting, but it doesn’t have to be. Understanding the basics is the first step. Stocks represent ownership in a company, and when you buy a stock, you become a part-owner of that company. The value of your stock will rise and fall based on the company’s performance and market conditions.
Trading vs Investing
You often hear these two terms used in the same context but they have very different meanings. Trading is the action of buying stock (shares) with a view to selling them within a relatively short timescale when they price rises. Short term can mean in a matter of days, or weeks (maybe longer) and of course within the same day (day trading). Professional traders may be buying and selling the same stock multiple times a day, taking small cuts as the market fluctuates. In general I don´t recommend this approach to anyone who is not extremely experienced and understands what they are doing, what moved the stock prices and when to be looking out for trading opportunities.
You will find countless people selling “trading strategies” and even automated software that claims to do it for you but tread that water with extreme caution. The truth is that trading is extremely risky. Professional traders have at their disposal an enormous amount of knowledge, tools, sources of news, inside information and much more to try to make fast and accurate decisions and yes, they make mistakes all the time. In the city, the very best traders who are on unthinkable salaries will often write off millions in lost trades as part and parcel of their model, it´s a hazard of the job.
I also strongly recommend that you avoid following things like “today´s biggest movers” on broker platforms because usually by the time you get in, the news is over and you end up buying at a high only for the value to drop and you never see that money again. Be warned, and be careful!
Long vs Short Trading & CFD
I won´t go into this in too much detail but I will cover the terms because if you do open a trader account with a broker then you will see these terms all over the place. In brief, long trading (or “going long”) is when a stock is purchased with the anticipation that it will go up in value. You own the asset and then later sell it.
Going short, or short selling, is a trading strategy used in an attempt to profit from a decline in an asset’s price. When shorting, you borrow the asset from a broker and immediately sell it, hoping to buy it back later at a lower price, return it to the lender, and pocket the difference. You don’t own the underlying asset when shorting.
CFD stands for “contract for difference.” CFD trading involves speculating on asset price movements without ownership, using leverage that amplifies both gains and losses. Compared to buying assets outright, CFD trading is much riskier due to the potential for rapid, large losses exceeding deposits, ongoing holding costs, lack of ownership rights or asset appreciation, counterparty risk with brokers, and often less regulatory oversight. These factors make risk management critical for CFD traders. My one word of advice is that unless you are an absolute expert, avoid this type of trading at all costs.
Investing is a different concept
When you “invest” the general idea is that you invest for the long term (or at least the foreseeable future). Put briefly, an investor buys an asset (shares, gold, whatever it may be) because they believe that over time it will grow and increase in value. In the short term, investments may fluctuate and go down and yes, even the best looking investments can go wrong and you can loose your money but careful investing, diversifying your investment and learning the basics all go towards increasing your chance of success and this is where on this blog and through the articles that are published I aim to help you learn and make valid decisions that you are comfortable with and that fit your personal situation. Incase you didn´t do it already please do sign up for the free periodic newsletter and check back regularly for the latest articles.
But let me be absolutely clear again, I am not a financial advisor (I will talk about them in another article too), but I am knowledgeable and experienced and qualified if nothing more than in experience over three decades, to write but that doesn´t mean that all I write is correct, yes I will always try and check my facts but even my opinions and “predictions” can be wrong and that´s something you need to learn from day one – there is not one person in the world that can tell you what to do with a cast iron guarantee. Even if you read opinions from leading Wall Street analysts and commentators you will find some that believe that one investment is a strong buy with urgency whilst others who believe the business is going nowhere and you should avoid it at all costs.
The key is that you take the time to educate yourself and look at the opinions of as many people as you can and make your own choices. Oh and don´t believe anything that the so called “experts” in forums tell you (well, at least don’t make your decisions based on what any single person says). Investing is like betting on the horses (something I personally am totally against) but everyone has an opinion, you can’t just bet everything based on one tip off!
Dividends, Growth or Both?
This is a subject for another article (or indeed many) but you will hear a lot of people talking about dividend stocks. Basically, some companies pay dividends to their shareholders. This means that they take a part of their profits and give it back to their shareholders each year (sometimes every 6 months, 3 months or even every month). A lot of people like dividend investing because they generate an income but there is a lot to take into account.
Generally (and this is a very loose generalization as there is a lot of ground to cover) but stocks that pay dividends tend to grow slower than non dividend paying stocks. That’s because non dividend paying stocks generally invest their profits into the continued growth of their businesses. Sometimes you will find stocks that have a high rate of dividend payments but this can in some cases be done to attract investors because of other underlying problems. Not always of course!
In reality you need to invest a lot of money into dividend paying stocks to generate any meaningful income but of course, everyone has their own goals and situation. I don’t personally invest in dividend paying stocks as a specific part of my strategy and when I do hold a stock that pays dividends I reinvest them so that the investment continues to grow. Compounding is another thing you need to learn about and we will cover in another article.
How to Buy and Sell Stocks
To invest in stocks, you need to open an online brokerage account. This account will allow you to buy and sell stocks or stock-based funds. Here are the steps to get started:
1. Open an online brokerage account: Choose a platform that suits your needs.
2. Fund your account: Add money to your brokerage account.
3. Choose your stocks: Research and select the stocks you want to invest in.
4. Place your order: Decide how many shares you want to buy and place your order.
Choosing a Trading Platform
Selecting the right trading platform is crucial. Look for a platform that offers low fees, a user-friendly interface, and good customer support. I will review some popular ones in the future. But, remember that free doesn’t always mean free. There are a lot of ways that margins can be incorporated into trades – spread (the difference between buy and sell prices), currency conversion and so on. But, choose a broker that is regulated either in your home country or in a reputable country and do a little research.
Remember, investing for beginners doesn’t have to be complicated. Start with small amounts and gradually increase your investments as you become more comfortable with the process.
Monitoring and Adjusting Your Investments
Tracking Investment Performance
It’s essential to keep an eye on how your investments are doing. Regularly reviewing your portfolio helps you understand which investments are performing well and which aren’t. This includes monitoring your investments, measuring performance, and adjusting as needed. It can also include adapting to changing factors such as when a business looks to be having issues, when a political situation changes, when the economy changes or indeed when your personal situation changes. It’s always good to know how your portfolio is doing and what your possible next move may be in any given situation. You can use various tools and platforms to track your investments’ performance and we will talk about this in more detail in another article
When to Buy or Sell
Knowing when to buy or sell is crucial. Market conditions change, and so do your personal circumstances. If a new job brings a higher income, you might have more money to invest each month. Regularly reviewing your investments ensures they still suit your personal circumstances. Here are some tips:
1. Set clear criteria for buying and selling.
2. Keep an eye on market trends.
3. Reassess your goals periodically.
Adjusting Your Strategy Over Time
Your investment strategy should evolve as you gain more experience and as your financial situation changes. It’s a good idea to periodically review the performance of your investments. Choices that were right for you two years ago may not necessarily be the best for you now. Whether you speak to an independent financial adviser or conduct your own review, it makes sense to reassess your investment choices regularly.
Your investment objectives evolve over time. Whether you’re trying to build up investments for a particular life event or maximizing your pension fund, what you’re looking to achieve with your investments can change over the years.
Conclusion
Starting your investment journey can seem daunting, but with the right preparation, it can be a rewarding experience. And whilst it may sound like climbing a mountain, it´s good to learn things so take a little interest, gain some understanding and start slowly. Remember to get your finances in order first by setting up an emergency fund and clearing any high-interest debts. Define your investment goals and understand your risk tolerance. Start small if needed and gradually increase your investments as you become more comfortable. By taking these steps, you can invest with confidence and work towards achieving your financial goals. Happy investing!
