Investing is a combination of an educated guess and leaning on faith. The educated guess portion is the one that you have the most control over. When it comes to determining what stocks or bonds you’d like to invest in, research needs to be your best friend. However, there are other considerations before actually purchasing investments.
Why are you investing?
In most things that you do, knowing the purpose for doing it is key; investing is no different. One of the most important factors for investing is time. The idea is that over time, your investment will grow to be worth more than it was when purchased. Historically, with every decrease that the stock market has experienced, it has rebound and recovered from that loss. For this reason, knowing your motivations will help. If you put money away for 30 years and your goal is being able to live comfortably in retirement, then it will be less likely for you to need to touch that investment. It may even be helpful to write down some things you would like to do with your earnings.
What money will you invest?
The next consideration is where you will get the money to invest. Without a source of money, there can be no buying of any financial instrument. You also never want to invest money that you cannot afford to lose. Investments can be unpredictable and aren’t guaranteed to net earnings. This is even truer over the short-term. Sometimes it can feel like a no-brainer to invest when you see the earnings from a stock compared to the dividends your savings account is giving you. But there are two major differences between those account types: insurance and liquidity. Most savings accounts are insured for at least $250,000 and you are able to easily withdraw cash at any time, which offers high liquidity. Investments can take more time to sell and convert to cash and you may suffer a loss in earnings if you have to make a quick decision at the wrong time. There’s also no insurance for investments to protect you from financial losses.
How will you decide where to invest?
How will you purchase your investments? With the increase in modern technology, there are lots of options. If you do a search for investing in your app store, you’ll get 20+ results. There are several variables that can help to narrow down how you will invest your money. If you would like to have someone else handle your investments, then most likely there will be a higher fee than using a self-investment app. Some common fees to look out for are:
- Transaction fees: a fee charged each time an investment is bought or sold.
- Monthly/Annual account fees: fees charged to keep your account open.
- Investment management fees: fees charged by investment advisors to manage your portfolio.
Investing can seem like a lot to understand in the beginning. Don’t put too much pressure on yourself and learn at your own pace. Keeping these considerations in mind prior to investing will help to get you organized and give a foundation for your research. The stock market has been in existence for over a hundred years, so don’t worry about feeling the pressure to start right away without doing the research needed to understand what you are investing in.