What to Know Before You Make Your First Investment

Set realistic expectations by understanding investing basics 

 

Think about the perfect investment; it would be safe, provide income, and grow. It is the "unicorn" of investing that everyone is looking for. Unfortunately, it doesn't exist.

Instead, you have to understand investing basics so you can combine investments to achieve the right combination of safety, income, and growth. The fancy term for combining investments is "building a portfolio." Here are three steps you can follow to make sure you have a handle on the basics.

What's Most Important to You

The first step to investing is to determine which of the following results are most important to you at this stage of your life:

• Safety
• Income
• Growth

If you are just starting out and have no emergency fund, you probably want to focus on safety first. If you have a cushion saved up, and you are investing for retirement 20 years or more down the road, growth would be most important. If you're about to retire, you'll want to focus on income.

Of course, the ideal investment would provide them all: it would be completely safe, it would provide you with a sufficient level of income to keep pace with inflation, AND your principal would grow.

That “perfect investment” does not exist. Instead, think of the investing world like a triangle. As you move toward one corner of the triangle, you move away from the other two. If you want an investment that is safe, you have to be willing to accept less income and growth. If you want an investment that produces a consistent income, you have to understand that it will not grow as much. If you want an investment that grows, you have to be willing to accept less safety.

Determine Your Time Horizon

• Short-term: money you will potentially need within 1-2 years. For short-term money, you should choose safe investments like savings accounts and CDs.
• Mid-term: Money you will potentially need within 3-9 years. For mid-term money, consider a balanced fund.
• Long-term: money you will not need for 10+ years. For long-term money, choose growth investments, like index mutual funds that invest in stocks.

Keep in mind, even if you will need income from your investments within a few years, your big-picture time horizon is your life expectancy, so a portion of your investments would still be allocated toward growth.

To invest with discipline, you must understand what investments provide which results, and combine them in the right proportions. Like cooking, if you know what you are doing when you put the ingredients together in the right proportion, you get an outcome that you are happy with. Once you have the recipe right, all you have to do is follow it.

Get Started

You'll need to decide if you are comfortable investing yourself, or if you should seek professional guidance. Your choices are:

• Do it yourself.
• Do it with someone to guide you.
• Let someone do it for you.

Many people are comfortable with setting up accounts online or through their employer's retirement plan. The kits provided by employer plans usually provide excellent educational information and will walk you through the actions required to establish an account and start putting money into investments.

Some of you will want some hand-holding. It is where the services of a good financial advisor can be quite valuable. An advisor/financial planner can help you determine what types of accounts to use, how much to save, what types of insurance you need and what investments to use. When you find a good financial advisor, you'll also find they will teach you about investing, so you learn as you go.

Unless you have advanced knowledge and experience as investor, you should probably seek help. Statistically, individual investors will find it hard to create sustainable, tax-efficient growth without the help of a professional. Your retirement savings isn't a place for financial experimentation. If you want to learn how markets work and start investing, use a virtual account that trades with fake money. Later, you could commit a small amount of real money to an account outside of your retirement funds.







SOURCE: www.thebalance.com