With investing, you are always looking towards the future, not the present. It is imperative that you take into consideration this when putting money away. One needs to know how long they can go without their investment before needing access to those funds. One also needs to be aware of how comfortable they are with risk. For some, they don’t mind higher risk investments, but others are much more comfortable with less risk, knowing what level of risk you prefer is a good to determine before investing.
With investing, you also can drop the money into an account and essentially ignore it until it matures or you can be very active in it. Some people have the time and inclination to be enthusiastically involved while others don’t want any part in this. Where do you stand? What investment methods are best for you? What works well for one doesn’t necessarily work well for someone else. While we all want our investment to grow, there are other issues at hand that you need to consider that go beyond just making money.
Getting Started Investing
So, you have determined that you have some money with which you would like to invest. An important question to ask yourself is how long of a time frame are you comfortable with? Are you hoping to obtain some or these funds in a year or so, perhaps a decade, or perhaps much longer? Wanting to gain access to this money within a year or so makes a big difference than in the next 20 years.
The reason why this is important is because for one, some investments don’t mature for a set period of years. You may have to wait 5 years before you can even access it. Or you may be able to get any of it at any time. While someone can help point you in certain types of investments, there are several questions you need to answer yourself before deciding where to put your money
If you are investing for a year or two only, I would suggest you don’t try anything too risky. Asking a financial advisor will help point you in many options for the given time. I would generally go with a set interest rate that you will know the outcome. This amount of time it a bit risky to play the markets expecting a higher return. Albeit, it depends on the risk level you are comfortable with.
A time frame of 5 to 10 years allows for many more options for investment. You can lock your funds in which usually allows for a higher rate of return. You can also go about it in different ways, you could drop all the money you have to invest down immediately or you could cost average it out over a year or so to allow for a possible better entrance points along the way. You can have this at monthly set points or try to buy a little on the market dips. It is entirely up to you, but this is where deciding your level of comfort is important. Also, as mentioned you are investing for the future, not the present, don’t sweat possible downturns in the market, you are looking at the end product, not the in-between.
Finally if you are investing for the long term, of 10, 20, 30+ years allows for much growth and patience. If you are looking at this time frame, decide whether they are to be used for retirement or not. If you are wanting to save specifically for retirement, be sure to look at a 401k or other related retirement specific funds. These types of investments are tax deductible. This allows you to not pay tax on the amount invested until you withdrawal them at retirement. It is a tax deferred system. But this generally allows you to pay tax on income at a time when your income will not be as high thus saving you money. Generally the longer the time frame, the more aggressive you can become with less risk.
Investing and risk go hand in hand. There is no truly perfect investment and some are a better choice than others. There are always factors that “could” mess with an investment. These include things like inflation, tax risk (changing laws), exchange rate risk, market risk, liquidity risk etc. This is not to scare you but that you know that is nothing 100% safe, only reduced risk. So this poses the question of how comfortable you are knowing that you may lose money? Is it worth the risk to possibly gain much more?
I once thought I was a higher risk person, but then when I had an aggressive portfolio and it started losing money, I quickly realized I am not a big risk taker. At that time, I moved my funds over to a much more conservative level and while I could have earned more in the aggressive level a few years later, I slept much better and continue to do so and will not switch back.
Knowing your risk level is important because while many people say you should invest this way or that, you will do yourself a huge favor if you are comfortable with and know the risks and expected rewards. Also beware of the thought that everything always goes up it just takes time and don’t get caught up in the hype of anything. Many people in real estate got burned badly in 2008 as well people who were invested in the Nikkei in 1990. If one invested in the Nikkei broad index in 1990, 26 years later and your investment is only worth 50%.
Another suggestion is to stick to investments from financial institutes that you trust. There are high risk investments out there that rarely pan out. There is an age old saying that is something sounds too good to be true it probably is.
Involvement in your investments is something many don’t think about. There is a tendency by most to just drop money into something and see what happens. There is absolutely nothing wrong with this approach at all but do be aware that there are often fees associated with this type of investing that could be avoided if you feel confident enough to make changes yourself. For example. If you feel you are able to read market and stock specific fundamentals well enough, you can buy and sell as you see fit and get away with only brokerage charges.
If this kind of investing interest you, I would encourage you to do all of your buys/sells on paper along with any fees involved not to mention educate yourself as much as you can on the subject. Many people do quite well with this approach, but if you jump into this thinking you can pull it off you may get lucky and do well but don’t let luck determine your long term goals.
Thanks to Kevin for providing this post.
[Photo Credit: stevepb]