Financial security is a crucial aspect of one’s present and future. You’ll never appreciate the importance of this until you’ve faced a critical situation requiring large amounts of money, and you’re left empty-handed. Regardless of your starting amount, establishing financial security is attainable through investing.
Investing is the act of putting your money in a place where it can grow and multiply. It’s a long journey that you’ll have to endure. If you’re expecting to see your money bear fruit overnight, then investing isn’t the right path for you. Even the most successful investors today will tell you that.
Another important reminder for investors is to make wise investment choices to make the most from your time, effort, and assets. With this in mind, here are six tips to help you become a wise investor:
1. Build Your Savings and Emergency Fund
Most people who have limited knowledge on money management often find themselves eager to invest and earn immediately, and that’s the perfect recipe for a disaster. While it’s completely normal to set high financial investment goals, you should build your personal savings and emergency fund first. Don’t put your money at risk without having any back-up money.
Savings essentially provides both short- and long-term financial security. But, unlike investments, they don’t have the potential to grow. If you’re planning to make a major purchase, whether a planned or emergency one, savings are there to save your day.
On another end, an emergency fund can protect you during financial emergencies that require a huge sum of money. For instance, your emergency fund will aid your daily financial needs in the event of unemployment until you find another job.
2. Consider Mixed Investments For Diversity
With numerous investment options and platforms today, it’s overwhelming to choose one that you’ll benefit the most from. If it’s only the start of your investing journey, it would be best to pick only the best investment option Canada that you’ll focus on. In this investment path, you’ll slowly learn the basics of investment, as well as assess the risks and rewards that come with it.
Consequently, if you’re determined to continue your investing journey, portfolio diversification has served many investors well. Through spreading your assets in different options and channels, you’re basically reducing your risks of losing them and maximizing your rewards.
An ideal diversified portfolio must contain the following components: bonds, domestic stocks, international stocks, and short-term investments.
3. Master The Art Of Risks and Gains
To make wise investment choices, you should be immersed in an investor’s mindset. Before stepping into the investment world, you might have seen a few advertisements about earning huge returns by putting in only a small amount of money. If these investment schemes seem too good to be true, then they definitely are.
The rule of thumb of investing is: low risks, low gains and high risks, high gains. Risk refers to the possibility of financial loss, while gain pertains to the value increase of your investment. If someone is encouraging you to invest a small amount, which means lower risks of losing your money, for an extravagant gain in a short amount of time, you mustn’t hesitate to decline and run away.
4. Use The Cost-Averaging Method
While being all out has more possibilities of higher gains, this isn’t ideal for beginners unless you’re fond of risks and can handle their consequences. One excellent way to minimize your financial risks on an investment is to utilize the dollar cost-averaging method. In this strategy, you’ll send a consistent amount of money on regular intervals, instead of putting all your money immediately.
The cost-averaging method is ideal for investors who tend to get swayed by emotions when investing. With the help of this strategy, you can prevent emotions from clouding your decisions. In case the prices suddenly go down, you can confidently stay in your lane instead of bailing out. You can take advantage of the situation by obtaining more shares.
But, the drawbacks of the cost-averaging method is its inability to differentiate good investments from a bad one. If your chosen industry became disadvantageous in the future, then you’re set to lose your investment steadily. This is why it’s crucial to perform thorough research to see which investments will be noteworthy.
5. Get Consistent Market Updates
Every industry has an unpredictable market. While there are certainly ups and downs of investing, no one can accurately predict what will happen. To stay competitive in your investments, you shouldn’t simply wait for your returns to grow, but also stay updated on new events and emerging trends. In this way, you can adapt accordingly.
Also, attempting to find the right time to invest, called market timing, is a dangerously ineffective strategy. For instance, imagine investing all your assets in the airline industry because you think that 2020 is a great year to invest in travel. But, if the industry takes a hit, so will your money.
6. Learn To Feel Comfortable With Discomfort
Investing is an emotional roller coaster, and you should’ve accepted this fact way before taking this path. Because of the market’s volatility and the act of investing itself, investors should learn how to be comfortable in being uncomfortable because investing is, indeed, a journey filled with risks.
Moreover, it’s important to set realistic expectations for your investments yet still stay committed to investing. It’s less possible for traditional portfolios to earn sufficient returns because stocks can only generate an average excess return if priced in average valuations, which is less likely due to costly stock markets.
Regardless of your chosen investment options, you’ll meet discomfort along the way. But, inflicting these types of discomfort to yourself will eventually be worth it as you harvest the long-term returns and not have to worry about your retirement.
There’s no age requirement in investing, but it would be a lot more advantageous to start early in life. As a young investor, you should keep in mind that investments aren’t all about money. While you’re still in your prime, investing your time and skills in a money-making path that makes you happy is the best favor that you could do for yourself.
After all, there are no one-size-fits-all tips and strategies in investing. You’ll have to figure things out on your own, sometimes, during your entire journey. But, these tips could help just when you need them.