Investments are something you put your money into or buy with a goal of getting a profitable return. Many people choose from four primary types of investments, which are known as asset classes; cash, bonds, shares and property. Other types of investments may include commodities, such as coffee or oil, foreign currency or collectibles. The assets an investor owns is called a portfolio.
Generally spreading your money among various asset classes increases your overall portfolio. It is important to understand that regardless of what you invest in, you are putting your money at risk. However, investing typically provides a much better return than a simple savings account. The following five tips will be beneficial when making your financial decisions.
When to Start Investing
There are a few things you should keep in mind before you begin investing. It is important to keep in mind that you must be prepared to lock your money away for at least five years, but the ideal situation is a decade or more. When preparing for these long-term goals, if other long-term financial goals are not already in place, they may be delayed. For example, if you plan on buying a home or a new car, you should have these in place before you start investing.
It is essential that you have plenty of money in your savings account, enough to cover your living expenses for a minimum of three months. Keep in mind that debt, especially interest payments, will typically outweigh any returns you receive from investments. So, make sure your debts are under control before investing. If your debt cannot be paid off, at least focus on reducing debt to something you are able to manage.
It is extremely important to set clear goals. When setting financial goals, think about your options. For example, do you want to grow your money? If so, what is the set amount? Are you looking for a source of regular income? If so, what is the minimum amount you need? Setting goals will help you decide how much risk you need to take in order to achieve your end result.
Knowing what your financial goal is will help you decide an approximate amount that you need to invest and for how long. Be realist about what you can afford to invest. Make sure you assess all of your expenses, including living costs, debts and insurance premiums. The amount you have left, is the extra cash you have to invest.
Once you have set your goals, you will need to determine how long it will take to achieve them. This will help you have a better idea of the kind of rate return you will need from your investments and whether your goals are realistic or not. You need to take into consideration several factors, such as your age and your health.
If your goals are short-term (five years or less), you may want to stick with a cash savings, because if your other investment falls in value, you may not have time to recover the loss before you need the money. Medium goals (5-10 years) and long-term goals (10 or more years) are appropriate for investments, but you may have less time for recovery if there is a fall in value, you are retired or you lose your capacity to earn money.
Spread Your Money
When it comes to investing, one of the most important things to remember is when you put all of your hard-earned cash into one asset class, if the company goes under, you will lose all of your investment. It is highly recommended that you diversify (divide your lump sum) across a portfolio and invest portions into various asset classes, companies or global markets. As one market falls, another will rise and cancel out your losses.
Investing your money for the first time is a big and sometimes scary step. It means you are taking a risk with your money, but in this situation, risks could mean a better return. Putting your money in an unpredictable market can be stressful, but history has shown that over the long-term asset equities by far outperform a cash savings. It is important to do your homework before investing. Research all options that may help you meet your goals.