The dream of achieving our personal goals, whatever they may be, can be deeply fulfilling. But to make those dreams a reality, we need to play our cards right. Due to some bad financial decisions, these expectations may never come true. A recent study shows that 58% of all Americans are currently living paycheck to paycheck. This means that traditional ways of saving money are no longer able to withstand inflation and the rising cost of living. In today’s financial environment, traditional methods, such as low-interest savings accounts, may not be enough. That is why it is now even more important to look for investment opportunities where we can put our money to work.
From thick file portfolios to colorful apps on our phones, financial investment instruments have become attractive to investors from all levels. But the increasing diversity has also brought confusion, especially for the beginners. Many may lack the knowledge and skills to make informed investment decisions. This can lead to many people failing to capitalize on the opportunity to increase their savings. Therefore, it pays to be prepared before entering this world of personal finance with almost endless possibilities. Before making your first investment decisions that will allow you to stand on your own two feet, it is worth stepping a few points.
What to Consider Before Investing
Behind the seemingly complex features of investments, there is actually a simple equation. How do you convert 1 unit you hold into, say, 2 units you can expect to earn. As this equation shows, there are two sides to every investment, the initial capital you possess and the potential gains realized through your chosen investment tool. With this in mind, before you invest your money in an asset with the expectation of increasing the amount you have, it is worthwhile to make a good and objective assessment of both your personal circumstances and the external factors that will affect your investment.
Personal Financial Health
Before you venture out into the outside world for your investments, you should take a good assessment of your own financial health. We are not just talking about the amount you see in your bank account. Investments, no matter how much you start with the expectation of profits, may not always yield the desired results. In the event of unforeseen circumstances, such as job loss or medical emergencies, having an emergency fund at your disposal can serve as a safety net. In the sometimes volatile world of finance, it can soften your hard falls. That’s why it would be a rookie mistake to tie up your entire holdings in an investment vehicle because you believe it will come back anyway. This could lead you to dispose of your investments at inopportune times. Although a bit harsh, we have to say that impulsive, ill-considered financial decisions have no place in a winner’s world.
“Investing should be more like watching paint dry, or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Paul Samuelson, American Economist.
In addition, an objective self assessment should also determine your investment budget to be allocated. In making this assessment, the budget for paying off high-interest debt should take priority over investment. For example, 11.2% of adults with student loan debt report that they have missed at least one student loan payment this year. In difficult situations like these, the temptation to get ahead can be too great and lead us to make the wrong decisions. But we must remember that high-interest debt can accumulate quickly and hinder the ability to generate positive returns over the long term. A clean slate, prioritizing debt repayment before acting on earnings expectations, is the right way to focus and avoid unnecessary financial burdens.
Goals and Time Horizon
Deciding what we want in life can be difficult, especially for young investors. But we can see the investments that will give us financial freedom as a path to our dreams. So we need to plan our path based on individual aspirations and financial needs. It is advisable to plan this in short-term goals for the immediate future and long-term goals for the future, which may seem far away for now but will come sooner than expected.
Short-term goals can range in scale from financing an upcoming vacation to saving for a down payment on a house. These goals are very different from long-term goals, such as retirement planning or financing higher education for children, as they are expected to pay off in a short period of time. Therefore, one’s time horizon also plays an important role in determining appropriate investment strategies. It shapes investors’ investments according to their age group and their current life expectancy. Younger individuals with longer time horizons may prefer more aggressive growth-oriented investments such as equities or equity mutual funds, while those nearing retirement may prefer more conservative options such as bonds or fixed income securities.
Investing according to your expectations and objectives will ensure that your portfolio achieves the desired results within the set timeframes. You need to answer whether an investment is right for you, taking into account your risk tolerance. The warnings that appear on many investment websites highlighting the risk associated with investments may not sound very serious, but there is a clear reason why this warning is so ubiquitous. For many years, the investment world has seen too many warriors defeated by financial losses they could not absorb. It would not want a bright new investor, full of expectations, to fall into this black hole. So, as the saying goes, we advise you not to take risks you don’t feel comfortable with. Big risk instruments can bring big gains, but they can also make you wonder “where did I get into this?”. Investment vehicles that have the potential for higher returns but also come with higher volatility, such as equities or real estate investment trusts (REITs), may be suitable for investors who are comfortable in high-risk areas. Conversely, those seeking greater stability may shift to lighter risk options such as bonds. Be honest with yourself about the levels of risk you are comfortable with to avoid financial consequences you cannot afford.
Costs and Fees
Another determining factor in achieving expected returns is the various costs associated with investing. These costs include brokerage fees, commissions, expense ratios for mutual funds or exchange-traded funds (ETFs) and management fees for professional portfolio management services. These charges are deducted from the profits we make, but they should not be eye-watering as they are deducted even if we do not make a profit. Fortunately, there are many resources available that allow you to conduct thorough research on different brokerages and trading platforms to compare fee structures before making any commitments. Over time, even seemingly small differences in fees can significantly erode investment returns, especially when compounded over longer time horizons. So doing your research before you start and finding a platform that suits you will be critical to achieving your expectations.
Tax Implications
There has been some confusion about the tax implications of investments, especially with new investment instruments such as crypto assets. Tax liabilities vary depending on the investment instrument, the income we earn and the time period, and depending on where we live. Therefore, we must also take the time to understand our tax obligations in order to fulfill our responsibilities properly and maximize after-tax returns on investments.
For example, capital gains taxes are levied on profits from the sale of investments held for more than one year. To minimize capital gains taxes, investors can strengthen their portfolios with other tax-efficient strategies. Holding in tax-advantaged accounts such as Individual Retirement Accounts (IRAs) or 401(k)s, where investments grow tax-free until they are withdrawn, can be considered to be advantageous.
Recommended Resources for Newbies
The Intelligent Investor by Benjamin Graham
Candlestick patterns: The Complete Guide
Millennial Investing – The Investor’s Podcast Network
Avoid These Beginner Mistakes
- Tracking Past Performance
While past performance may provide some insights into an investment’s historical returns, relying solely on it as a basis for future expectations is not advisable. Market conditions are ever-changing, and investments that have performed well in the past may not necessarily continue to do so.
- Emotional Investments
Emotions such as fear and greed can significantly impact investment choices. Fear of missing out (FOMO) or panic selling during market downturns can lead to poor decision-making and potential losses. It is important to stay rational, stick to one’s investment plan, and avoid making impulsive decisions based on emotional reactions.
- Failure to Rebalance Portfolios
The old saying “never put all your eggs in one basket” is finally paying off. Portfolio rebalancing involves periodically rearranging asset allocations to maintain desired outcomes and risk levels. In simpler terms, it is simply putting your eggs in different baskets. Failure to do so can lead to unwanted deviations from the original investment strategy and expose you to either too much or too little risk, depending on market conditions. This will ultimately affect the outcome.
- Falling for Too-Good-to-be-True Schemes
Newbie investors should be cautious against falling for potential scams or fraudulent schemes promising unrealistic returns. Conducting thorough research, seeking advice from reputable financial advisors, and being skeptical of offers that seem too good to be true are essential precautions in protecting your investments.
Final Words
We hope you are not intimidated by all these critical points we have touched upon. Investments, although they come with responsibilities and steps that need to be taken thoughtfully, are encouraging because of the results they promise. The decision-making shaped by a period of good preparation will be your guide to becoming a wise investor. Therefore, no matter how tempting the investment option may seem at the time, it is important not to act without considering these few steps. No matter how long it takes, the return on an investment option that you enter prepared and experience at your own pace will be more realistic than an impulsive, emotional decision. If these methods resonate with you, you are well on your way to becoming a smart trader. Make your preparations and the investment world will be waiting for you with promising options to offer.
