Whether you’re looking ahead to your retirement, or simply want to start generating some passive income, starting to invest may seem like a daunting task. At first, it seems like the number of possible investments is dizzying and you may be worried about losing all your money. Fear not though! There are a number of things you can do when you start investing to not only reduce the likelihood of analysis paralysis, but also keep from losing all your money. Keep reading to learn the basics of how to invest your money like a pro.
What do I need to get Started Investing like a Pro?
The first thing you’ll need to do before you start investing is develop a plan. Generally, an investing plan contains the following:
- Specific and Realistic Goals: Most people won’t be able to earn a million dollars through investing by the time they are 35. And what does a goal like “live like a king when I retire” mean? You’ll need to get more specific like, “be able to afford to spend every summer relaxing on my boat all day.”
- Monthly Investment Amount: This is the amount of money you’ll need to invest each month to reach your goal.
- Investment Strategy: At a high level, your investment strategy determines how much risk you are willing to take. If you’re looking to the long term and can afford to weather the occasional setback, you may want to adopt a strategy that is higher risk, higher reward. However, if your investing goals are shorter term, you may want to take a more conservative approach.
- Investment Policy Statement: This statement guides your investment decisions. Additionally, if you have an investment advisor, it will be a set of rules for them to follow while managing your portfolio. You’ll need to include important information like:
- Investment goals and objectives
- Strategies to help meet those goals and objectives
- Time horizon and return expectations
- How much risk you’re willing to take
- Outline of the types of investments and how accessible your money needs to be
- How your portfolio will be monitored and what the rebalancing plan is
Why is it Important to have an Investment Strategy?
Investing is like any other activity with a goal, like a sport or a board game, you’ll be more successful if you develop a specific strategy to work towards that goal. If you simply chase fads or drop things the moment they stop working, you could seriously damage your investments. In contrast, having a well-defined strategy well help you take advantage of unexpected boons and recover from the odd setback.
How do I Determine the Level of Risk I’m Comfortable with?
This is something everyone has to determine for themselves. Getting a professional involved to help you is also a great idea. Generally, there are three variables you need to consider when figuring out exactly how much risk you’re willing to take when investing:
- Stability: How likely the investment is to fluctuate in value. For example, the only thing influencing the value of cash is inflation. In contrast, a speculative investment could pay out large amounts of money, or none at all.
- Liquidity: How accessible the money is. Again, cash is almost immediately accessible, whereas something like a bond cannot normally be accessed outside of predetermined circumstances.
- Growth: How likely the investment is to grow in value. For a third time, cash is the most inert investment and least likely to grow in value. In contrast, a speculative investment often has a great deal of growth potential.
Experts generally agree that when deciding on your risk level, you’ll only be able to focus on two of the above. This means you’ll need to comfortable with a potential downside to your investment strategy:
- High Stability and High Growth = Low Liquidity
- High Stability and High Liquidity = Low Growth
- High Liquidity and High Growth = Low Stability
If you’re still not sure what sort of investment plan is right for you, there’s plenty of information online that can help you figure out what sort of plan might be best.
What should I do if my Investment Strategy isn’t Working?
Sometimes market conditions change. Sometimes your situation changes. You can’t always predict these. The most important thing to do is to not get discouraged and not give up. After that, you’ll need to pivot. You’ll need to review your current strategy and determine where it’s gone right and where it’s gone wrong. Once you’ve done that analysis, you’ll need to develop and implement a new strategy. Then, see how that strategy works. If it does work, great. If not, adjust it again. And keep going until you have a strategy that works for your goals.
There, that wasn’t so terrifying, was it? Now you should have a much better idea of how to get started on your journey towards being able to invest your money like a pro. That said, there’s plenty more to learn. One of the best ways to do that is to keep researching and get in contact with an investment professional. They can make recommendations and help you find your feet.