What is Investing?
Investing is the process of allocating resources, usually money, with the expectation of generating an income or profit. You can invest in endeavors, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price.
Why Invest?
Investing allows you to significantly grow your money over time due to the power of compound returns. Compounding can be called the Eighth Wonder of the World. Thanks to the power of compounding, a single penny could theoretically turn into millions of dollars, given enough time. You may not have a hundred years, but you have more time than you think.
Types of Investments
- Stocks: When you buy shares of a company’s stock, you own a piece of that company. Stocks come with high risk, but if the company grows over time, so does your investment.
- Bonds: Bonds are like IOUs. When you purchase a bond, you’re lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out.
- Mutual Funds: Mutual funds allow you to buy many stocks, bonds, and other securities all at once. They’re managed by professionals and designed to match certain predetermined investment objectives.
How to Start Investing
Set your goals: The first step to start investing is defining your financial goals. Do you want to buy a house in five years? Your investment strategy for these short-term goals differs significantly from long-term goals such as retirement.
Create a budget: Before you start investing, it’s essential to organize your finances. It’s important not to invest money that you can’t afford to lose.
Choose the right investment platform: These days, online investment platforms make investing accessible to everyone. You can start investing with very small amounts of money.
Diversify your portfolio: Diversification involves spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time.
Regularly review your portfolio: Over time, your investment portfolio can change. Make sure you’re regularly rebalancing your portfolio according to your investment goals.
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| Diversification is key to a balanced portfolio |
Understanding Risk
Risk is a fundamental concept in investing. It refers to the degree of uncertainty and potential financial loss inherent in an investment decision.
In general, as investment risks rise, investors seek higher returns to compensate for taking on such risks.
Asset Allocation
Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.
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| Asset allocation chart |
Dollar-Cost Averaging
Dollar-cost averaging is a strategy in which an investor places a fixed dollar amount into a given investment (usually common stock) on a regular basis. The investment generally takes place each and every month regardless of what is occurring in the financial markets. As a result, when the price of a given investment rises, the investor will be able to purchase fewer shares.
Rebalancing
Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation.
Remember, investing is a long-term endeavor. Understanding the basic principles and the different types of investments is the first step towards a successful investment journey. Always do your research and consider seeking advice from a certified financial planner.
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