How to make smart investment decisions for a better financial future
Many of us wish we could grow our wealth, and even putting aside savings each month doesn’t seem to make much impact. In fact, money sitting in the bank is gradually depleting in value against market rates. But the world of investment can be daunting, especially to beginners, who may not know how or when to start. Money invested is a much better way to keep the value of your finances in tune with inflation and other market fluctuations, rather than gathering dust in your savings account.
There are some common misconceptions about starting an investment portfolio — one is that you need a lot of money, to begin with. Another is that fortunes are made overnight — rather, careful planning and intelligent, informed choices (sometimes with professional input) will more likely grow wealth gradually. Smart decisions are worth much more than huge gambles. Let’s take a look at how to make smarter decisions to secure a better financial future.
Set clear goals
It’s a simple question, but one many overlook before they begin to invest. What do I want to achieve with my investment? A common goal is an early retirement — earning enough from investments to live comfortably sounds like a dream to most, but identifying it as a goal gives you a target to work towards. It’s also a good example of a long-term goal — other long-term goals include college tuition funds, major travel plans, and buying a house outright — five years or more away.
If your goal is to pay for a great holiday next year, fund a big family wedding, or have enough for a deposit for a home, these are shorter-term goals, and this will affect the way you plan your investments, which should be chosen with your tolerance for risk in mind.
Professional advice
Whatever kind of investment you’re making, the process can seem intimidating, and many newbies feel completely out of their depth. If this is the case for you, consulting with investment professionals is well worth your time. Professionals can guide you through the all-important planning stage, explaining the process and tailoring a plan for your personal circumstances, finances, and goals. They will factor in your monthly living expenses, credit rating, and risk tolerance.
With the planning stage sorted, the next step in working with a professional is to determine an investment strategy, to avoid rash or emotional decisions, and other potential pitfalls that can derail your financial growth. You’ll also receive guidance on how to read investment statements and other communications.
Types of investment
There are many different types of investment, all of which behave differently and may suit different people. Many find it wise to diversify their investments across several of these.
Stocks
When you buy stock you’re buying an ownership stake in a publicly traded company. Once this stock rises in value (hopefully) it can be sold. There is an inherent risk in buying stocks — a market crash or a company default can see your investment go down the proverbial.
Bonds
Buying bonds refers to lending to a company or government institution. When the bond (hopefully) matures you can take back the principal and your interest. This comes with similar risks to stock investments.
Mutual funds
This refers to a pool made up of several investors’ money which is invested in a number of companies. The diversification of the funds means that, although governed by the same concepts as stocks and bonds, the risk is slightly less.
Commodities
Commodity investment means investing in a single product. If you’re investing this way, it’s very important to know about the product and industry you’re involved with — you’ve either worked in said industry before or have conducted extremely thorough research.
Risk assessment
All investment comes with an element of risk, but you can prepare for it with diligent research and diversification. How much risk you’re willing to take, bearing in mind your financial situation and mental resilience, should be informed by careful and meticulous research and awareness of market trends, as well as by your long-term goals and strategy. It’s prudent, therefore, to regularly monitor your portfolio’s performance and review your risk tolerance. As your circumstances and market conditions change, you may need to adjust your investment strategy accordingly — professional services can also be a big help with this, and usually offer a risk assessment service.
Diversifying your investment portfolio across different asset classes can reduce risk — this means spreading your investments across stocks, bonds, property, and other investment vehicles which are not necessarily governed by the same market trends and fluctuations. Research and analysis are essential when it comes to identifying risk. Now that you have investments, it’s time to start reading that financial section of the newspaper that you’ve always ignored.
Wealth is grown through wise decisions. Whatever your goals, making smart decisions is the cornerstone of any successful investment.
