Each and every one of us has individual goals that we plan to reach during our lifetime and many of these goals, if not all, cost money. The fact is, we must learn how to manage our assets and make money work for us.
To establish a savings routine you need to create a monthly budget. Savings are critical; both to achieve those life goals, but also in a time of emergency. Whilst returns on cash are low, investing can be a good alternative, to generate returns and to grow your assets. But by investing you are taking on more risk and as a first-time investor there are a few steps that you should follow.
1) Find your investing style
Before settling on your investment options, it is important to understand the relationship between reward and risk. High-risk investments translate to high potential rewards but also high potential losses. Risk is part of investing, there is no guarantee that you will make money on an investment, you could even lose money.
However, if you are an overly cautious investor you run the risk that inflation will be higher than your returns, thereby diminishing your purchasing power. On the other hand, high risk investments are more volatile which may not work for the short-term investor. It is really important that you understand your tolerance to risk before you invest. Balancing your investment goals with your attitude to risk is the basis for successful investing.
2) Diversify your investments
A new investor needs to understand that it is not wise to place all your eggs in one basket. The balance between risk and reward is important to every investor: one way to achieve this is through diversification. Diversification ensures that investments are distributed across varied asset classes or investments: some with low risks, some with higher risks.
A diversified portfolio includes bonds, stocks, and a savings vehicle that levels the market. A new investor needs to select their own combination based on their investment style, risk tolerance, time horizon and goals. Diversification via an asset allocation strategy is a good way to manage volatility and portfolio risk, but there is no assurance of overall return. Diversification doesn’t wipe out the risk of investment loss.
3) Make investing easy
Automated investment services, also termed as robo advisors or digital wealth managers, make investing inexpensive and easy. These organisations strike out the uncertainty and pain surrounding investments. They develop a portfolio for you, invest using exchange-traded funds (ETFs), reinvest dividends, harvest tax losses and rebalance.
It is important to select a service provider that suits your needs. There are a number of differences that you will need to understand before selecting a provider, the main one being the impact of cost.
4) Seek financial advice
For first-time investors, there is a chance that they may come into the investment field feeling overly confident and overlook the value of financial advice. They may decide to invest in funds using the many online services available, picking stocks and asset classes based on what they think they know. Financial advice can help you to understand the right level of risk for you and also the investments that can help with this. It is important to take the time to read about the different asset classes and also the terms used such as tracking error.