If this is the first time you’re considering investing as a way to increase your income, then this article is for you. As you can imagine, investing is hard work. It takes a lot of time, dedication, and research. And like with all new things, investing can be tough when you’re just starting out. In this article, we’re going to share our thoughts on what new investors need to do and how they can make things a bit easier for themselves.
Step One – Define Your Investment Goals
The first step is to clearly define your financial and non-financial goals. You need to think about why you want to invest and what has triggered this decision. You also need to decide exactly what you want to achieve when it comes to increasing your earnings. If it is a non-financial goal and simply something that will make you happy – like a visit to the Maldives for a month spent scuba diving – then that’s what you need to focus on. The next step is to attach a monetary value to this non-financial goal – say $10,000 – and to decide a reasonable timeframe for achieving it – say in the next 5 years.
Now you have laid the foundation – you have found your reason for investing – and you have established a time frame within which you want this to be accomplished.
In financial terms, you have set your investment goal and time horizon for reaching it. Here is a word of caution for everyone – no matter how much investing experience you have – never take shortcuts. It might be tempting to try to find quicker, easier ways to reach your goals. But if you focus on the potential returns, and you ignore the risks, then you might find yourself dealing with unexpected pitfalls, and maybe even unexpected losses.
Step Two – Determine Your Risk Tolerance
After setting your financial goal in stone, the next thing to do is to consider your risk tolerance. This is extremely important when it comes to investing and to determining how comfortable you are with seeing potential dips in your invested capital. You need to know that some losses are inevitable, and that they will occur at some point during the investment cycle.
There could be many reasons for this – a slowdown in the economy, a global pandemic, a war, a change of interest rates, or any other market conditions that might have been hard to predict at the start of your investment. As such, you need to decide on your own what fluctuations you can tolerate, and how much you are comfortable risking. To make things clearer, say that you are planning on starting with €5,000, and you can tolerate a fluctuation of €2,000, that is a 40% potential drop in your capital. The other thing you need to keep in mind is that the markets aren’t static, and that just because things aren’t currently working in your favour, it doesn’t mean that the market won’t turn around and that you’ll start making money again.
Step Three – Decide On Your Target Rewards
As you progress with building your investment profile, the next thing to consider is the target returns that you are looking to make. After all there isn’t just risk when investing, there is also the opportunity for great gains. Based on your goal and the time horizon you have set for yourself, it’s time for you to build a portfolio. You want to aim for a well-diversified portfolio, one that can help you achieve your target returns in a cost-effective way, that provides you with peace of mind, and that makes you feel confident you will succeed.
4 – Determine The Best Way To Invest
Let’s go back to our previous example – the one with the €5,000 investment and the 40% risk tolerance. You will need to build a portfolio that includes different products and that meets your time and risk requirements. So, now it’s time to roll up our sleeves and get into the nitty gritty detail.
As we mentioned in our recent article about stock investing, here you will have a choice: either to do it yourself, or to let an investment firm do it for you. No matter what you choose, you still need to have a basic understanding of the products you’re investing in and the various options that might be presented to you. For example, stocks and alternative investment solutions are typically considered high risk, high rewards investment options. Other investments such as bonds and credit deposits, when backed by the government, are often considered low risk, low reward investment options.
The hard part is finding a balance between those options, one that both generates you the desired income and still drives the risk down. It isn’t unusual for stock investments to fluctuate by up to 20% – or even 40% – in a year. And so, when looking at a €5000 example investment with a 40% risk tolerance, creating a portfolio that consists entirely of stocks probably wouldn’t be the best thing to do.
One method for determining how to construct your portfolio is the 120 rule. You take 120 and you subtract your age from it. For example, say that you are 40 years of age, and that you are looking at how to consolidate your financial position. For the past several years, you have seen how inflation has been eroding your savings and how the cost of living has been rising from one to the next year. So by applying the 120 rule, you subtract your age from 120, and you get a result of 80. You use this rule to decide how much of your funds to allocate stocks – and you decide to invest 80% of your capital into stocks and alternative investment solutions. You also decide to invest the remaining amount into bonds and other less risky assets.
There are other options that you can look at to further augment your portfolio and make it a solid investment for yourself. For example, you could consider investing in Funds and ETFs, Property, Precious Metals, and other commodities.
When you’re just starting out, it can be hard to know the best way to invest your money. The first step is to determine your investment timeframe and goals. Then you need to look at your risk tolerance and potential rewards. After you’ve got a rough idea of what you want to achieve, you need to create an investment portfolio that enables you to reach your desired level of income. If you would like more information about how investing works, feel free to take a look at our blog or to contact our investment management team.
Risk Warning: The information in this article is presented for general information and shall be treated as a marketing communication only. This analysis is not a recommendation to sell or buy any instrument. Investing in financial instruments involves a high degree of risk and may not be suitable for all investors. Trading in financial instruments can result in both an increase and a decrease in capital.