If the world of investing is completely new to you, you might not know where to start. There are thousands of websites and books out there that are designed for beginners – but even sources like those can be intimidating or hard to grasp. So instead of learning about the world of investing from other people’s points of view, why not begin by thinking about investing from your perspective?
To start, consider the following questions. Your answers might not make the world of investing easier to decipher, but understanding who you are as an investor can help you make decisions when it comes time to invest.
What are your investment goals?
An investment goal is integral to your investment plans. It will help you determine several other factors of your plan, such as how to invest your money, how much money to invest, and when to cash out your investment. You can imagine how different investing for retirement in 25 years would be versus investing for house renovations that you plan on making in the next few years. The goals are entirely different – how you invest for them should be different, too.
This might seem like an obvious step, but it isn’t uncommon for people to invest and build a pool of money with no specific use. This might not seem like a bad idea, but the rules, taxes, penalties, and fees attached to some investments can make it difficult and/or costly to access the money. By creating a goal and investing accordingly, you can avoid these extra costs and headaches and get the most out of your investments.
How liquid does the investment need to be?
The liquidity of your investment – how easy it is to access and withdraw your investment – will more or less be determined by your investment goals. Cash, bonds, and stocks are generally considered liquid investments while real estate and private company interest are considered illiquid.
Generally speaking, if you’ll need money sooner rather than later, or at a moment’s notice, you’ll want to choose liquid investments.
What is your risk tolerance?
Risk is involved with any investment. However, not all investments are equally risky. Bonds are generally less risky than stocks but offer less return on your investment. Stocks are just the opposite; they are riskier than bonds, but generally have higher potential returns.
Things to consider when determining your risk tolerance: will a loss on your investment cripple your finances? If your investment loses money, can you afford to stick with the investment and wait for it to recover?
If you decide that your risk tolerance is very low, it doesn’t mean you should avoid investing – it just means you have to invest accordingly.
How much money is available to invest?
While there are plenty of ways to invest, your options might be limited by the amount of money you have available to do so. Savings accounts, CDs, and mutual funds often have low – or no – minimum investment. Stocks on the other hand might require a lot of money up front.
Your individual situation
In addition to these general questions, your situation might raise some specific questions as you get started with investing. We’d love to provide insight and feedback, so feel free to comment below or contact us privately, and let us know what questions you have about investing.