The Novice Investor

Many successful investors follow this one rule of thumb: Never invest in something you don’t understand.

If you’re new to investing, figuring out how to get started and where to start your investing journey can be challenging. First things first before you invest, set goals, create a financial plan, and save and invest over a long-period-of-time will help put you on a path toward building a strong financial future.

Moreover, it’s important to think about what are the reasons and goals you want to save and invest for in life−a house, an emergency fund, retirement. Then decide your financial priorities and plan accordingly. Keep in mind that when you start early, your money grows through the magic of compounding.

When creating your financial plan, you should also consider paying yourself first and paying off any high-interest debt. For example, the interest rate on credit cards is often far higher than the returns you can expect from your investments. No investment strategy pays off as well as, or with less risk than, eliminating high interest debt.

The first steps to successful investing include:

What is your current cash flow (income – expenses) and net worth (assets – liabilities)?
How much are you going to invest?
For how long? What are your financial goals?
Do you understand your tolerance for risk? All investments carry some risk.

You’re money can grow when you save and invest wisely.

The actions toward financial freedom and building wealth include three basic steps: first, pay off high-interest debt; second, set goals and make a financial plan; and third, start saving and investing early and often.

Knowing how to secure your financial well-being is one of the most important things you’ll ever need in life. And, you don’t have to be a financial genius to do it. You just need to know a few basics financial rules, create a plan, and be prepared to stick to it. No matter how much or little money you have, the important thing is to focus on getting started, to become financially literate and to educate yourself about your opportunities.

As a first-time investor, you should always ask yourself a few questions before you commit your hard-earned money and capital to an investment. In addition, new investors should check the background of anyone or any company promoting an investment opportunity, even before learning about opportunity itself.

Do you understand the investment? Many successful investors follow this simple rule: “Never invest in something you don’t understand.” Be sure to always read an investment’s prospectus or disclosure statement carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional for help. If you are still confused, you should think twice about investing.
How do the risks compare with the potential rewards? Can you afford to lose the money or capital you are about to invest? The potential for greater returns comes with greater risk. Understanding this trade-off between risk and reward can help you since investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses. Keep in mind every investment carries some degree of risk.
Where can you turn for help? Whether checking out an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a great advantage when it comes to investing wisely. Make a habit of using the information and tools on securities regulators’ or third party websites

As a initial step, it’s important to understand your financial goals, the different kinds of accounts, and investments that can get you moving in the right direction.

Stocks. When you buy a stock, you own a piece of a company and its cash flow and profits. Stocks have high growth potential, but with that comes high risk.
Bonds. Bonds are loans where you’re the creditor. You lend money to the bond issuer in exchange for repayment with interest by a certain date. Bonds are considered moderate-risk investments.
Cash. Cash in your portfolio can preserve the value of your money when you’re saving for short-term goals. It carries the least risk when it comes to losing money in the short term, but there’s also not much potential for growth and in the long term there is risk of inflation and lost purchasing power.

No one can provide an 100% guarantee that you’ll make money from investing. But if you get the facts about investing and follow through with an intelligent investment plan, you should be able to gain financial security over the long term and enjoy the benefits of managing your money.

No one is born knowing inherently how to save or to invest wisely. Every successful investor starts with learning the basics and getting started. For most people, the only way to attain financial security is to save for the future and invest over a long period of time.

Time after time, people of even modest means who begin the saving and investing journey reach financial security and all that it promises: buying a home, educational opportunities for their children, and a comfortable retirement. If they can do it, so can you.

References:

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