In most areas of life, principles offer direction. Even in investing, they can serve as guidance especially if you’re just starting out and don’t know where to begin.
Here are some basic principles that can help you get on the right path and stay disciplined as you go through your journey.
1. Start when you're ready
You need money to invest, and you must be willing to accept a certain amount of risk to possibly get the returns you want. That’s why it’s important to have a plan for how you’ll invest and prepare for the unexpected.
Here are 2 signs you’re ready to start:
- You’re in good financial health
Establish a solid financial foundation before investing to minimize the impact of loss or unexpected events. Pay off high-interest debt, build an emergency fund, and make sure you have enough money for day-to-day expenses.
Financial markets can be unpredictable, and so you don’t want to invest money that you may need in the short term.
- You have a plan
This can be as simple as answering the question: what are you investing for? Whether you’re growing money for retirement or a big purchase like a house, you need to identify a timeline and goal amount.
These factors matter when choosing your investing approach and where you’ll put your money.
Learn more about the things to prepare before you invest in this article.
2. Do your research
As you look for investment options, you’ll come across different types as well as different people telling you what to invest in. However, not all these products will suit you.
There are things to consider, like your risk profile and goals. Different asset classes pose varying levels of risk and return, and so you should learn about the unique features of each one.
When doing your research, find credible sources of investing information and consult experts when you need to. Be careful not to let bias – like herd mentality – influence your decisions.
Another thing to choose wisely is your broker, fund manager, or investment partner. Include them in your research to help ensure that your money will be put to good use.
See more tips on how to choose the right investment and investing service for you.
3. Understand the risk-return relationship
Part of choosing investment products and strategies is understanding the relationship between risk and return. In simple terms, the greater the risk you take, the higher the potential return, and vice versa.
For example, stocks tend to offer higher returns over the long term, but they’re also more volatile in the short term. Meanwhile, fixed-income products like bonds are generally safer but may bring relatively lower returns.
You should also keep the risk-return tradeoff in mind to stay safe from investing scams. It’s best to be wary of any investment opportunity that promises high returns and claims to be free of risk.
Learn more about how to strike a balance between risk and reward in this article.
4. Manage your risks
While taking on some risk is part of investing, there are strategies for minimizing it. Here are the 3 to know:
- Diversification
This involves spreading your investments across different asset classes, sectors, and geographic locations to protect yourself from downturns in any 1 area.
- Asset allocation
This is about having the right mix of assets in your portfolio based on your goals and risk tolerance. If you’re young and have a long time to invest, you might be able to take on more risk.
If you're closer to retirement, it might be better to lean toward safer, income-producing investments.
- Rebalancing
Over time, your investments will perform differently, and some assets may reach maturity. You’ll also go through life changes, like marriage or career milestones, and so your financial situation and needs may evolve.
It’s important to periodically review your portfolio and rebalance as needed to ensure it still meets your needs.
To learn more, read our articles on how to diversify and choose the right asset allocation option.
5. Take advantage of the power of compounding
You should invest when you’re ready, but it’s also crucial to start as early as you can. The longer you stay invested, the more you can benefit from compound growth.
This means your returns will generate more returns over time. The trick is to keep reinvesting what you earn from your investments and avoid taking your money out of investments too soon.
Doing so will teach you the value of patience, discipline, and consistency in successfully reaching for goals.
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