“Never depend on a single income, make an investment to create a second source.”- Warren Buffett
Everyone has heard that it’s important to invest your money, but it can be overwhelming. There are so many factors to look into and so many things to understand before you invest. Let us look at the classic tips that make it easy for us to invest right.
- Know why you are investing: In any scenario of life, it is important to know why you are doing something or else, it's not worth it. So knowing why you want to invest is important. It can also act as a great motivating factor. It could be to buy a house, a car, to start a business or to travel the world. If you have a plan for the money you want to invest, then you will put in the effort to invest the money in the right place.
- Think long-term: Investing in stocks, bonds or mutual funds should only be done, if you have a long time to grow that money. This is because these markets, especially the stock market, can be extremely volatile. So, you should at least have a 10 or more years as a horizon to grow the money. If you want to get a higher return, you have to take on more investment risk. The longer you hold the investments, the less risky they are. But the ride won’t be a smooth one.
- Know your investment or invest in what you know: People often invest in the popular thing or the more complex thing, believing that it is the best type of investment, but that may not work out. It is important that one should study the different options available and the market before making the decision of where and how to invest. It is also important that the investment is well understood by the investor if it is far too difficult to do so it is better to pass on it.
- Have a Plan: Having a plan goes hand in hand with knowing your why or your purpose. Let’s take retirement as an example. Ask yourself some questions to help make your plan.
- When do I want to retire?
- How much income do I want in today’s money?
- What will my expenses be?
- What sources of income will I have (like pension and inheritance)?
Using these questions, make a plan and understand your finances. After understanding your finances and your needs, find the best place to invest that suits you and gives you a guarantee that the things you need to implement your plan.
- Control Costs: Investment costs can hurt your returns. Fortunately, it’s one of the few things investors can control. Investing in low-cost index funds such as mutual funds or ETFs is the best way to keep costs low. Index funds are passive investment funds. They simply invest in all the stock in the index. They don’t buy and sell stocks at any other time during the year, though some exceptions may apply. There are minimal trading costs and no management fees. Many index fund total expenses are less than 0.10%.
- Know the difference between price and value: Stock prices are pushed constantly. For some reason, investors love to fixate on ticker quotes running across the screen. There can be periods of time in the market, where stock prices have zero correlation with the longer-term outlook for a company. Stock prices may mess with investors' emotions, but that doesn’t mean a company’s future stream of cash inflow will be changed. Investors need to distinguish between price and value, focusing on the ideal investment at the most reasonable prices today.
- Most news is not news; it is noise: There is no shortage of financial news hitting your inbox each day. Brushing off almost all of the information pushed in one’s way is important, because when it comes to financial news, most of the news headlines and conversations on TV are there to generate news and trigger one’s emotions to do something radical.
- Monitor progress: Looking at investment returns is important, as it relates to getting the returns necessary to achieve your goals. If you’re investing in low-cost index funds, you’re getting market returns minus costs. You won’t need to switch to a “better” fund to increase returns. Rebalancing means selling those funds that have increased higher than the amount your plan says you should have in them. With the money from those sales, you invest in other funds that have fallen. It’s one way to take advantage of buying low and selling high. Rebalancing helps manage investment risk and keep the portfolio invested in the way your plan sets.
- Be Flexible: Investment and financial planning are not one-time events. Life happens. Health issues, divorce and job changes may cause you to adjust your plans. Don’t panic and make drastic changes. An annual checkup offers the opportunity to make any changes necessary.
- Continue learning: Whether you invest on your own or rely on an advisor, educating yourself about the markets, investing and retirement planning will help you make better decisions. There is no shortage of noise in the 24-hour news cycle of today. The noise comes from a lot of different places in a lot of different ways. Learn as much as you can to shield your investments.
The world of investing can be very intimidating, but if you understand it properly, it's a very interesting and a fruitful area to explore. With the right plan and by following the correct steps, an investment can be a very beneficial way to grow money.