Have you been thinking about investing, but not sure where to start? Before you start investing and commit your money, it’s important to understand what kind of investor you are!
Determine Your Risk Tolerance
Before you start investing, you need to understand your risk tolerance, are you conservative or are you an aggressive investor? It’s important to understand how comfortable you are with risk. There are also hundreds of online questionnaires that can help you determine your risk tolerance, here is
Your Time Horizon
Your time horizon can have a significant impact on your risk tolerance. For example, if you are in investing in your 20’s you have a long time before retirement and therefore are able to take on more risk and ride out any market volatility. Whereas, if you are approaching retirement, you would generally have a much lower risk tolerance as you will be needing to use that money in the near term.
Only Invest What You Can Afford
It’s important that you only invest what you can afford, do not invest all of your savings! While you can always sell your investments, you can’t always guarantee the price and may find that if you had to sell in a hurry, you could lose money. You should only invest money you know you will not need in the short to medium term. You should always have a few months’ expenses, in your savings account in case of an emergency.
Only Invest in What You Believe in & Understand
Do not invest into companies or funds that you do not believe in or understand. You should do your own research before investing your own money, don’t just believe what you hear on the radio. You need to make sure that it aligns with your risk tolerance, investment strategy and financial goals.
Set & Forget
Building passive income through using a long-term buy and hold investment strategy, will allow you to ‘set and forget’. You should be investing for your future and your style should reflect this. Automating your investment process will help you to build wealth and spend more time doing things that are important to you, rather than managing your money.
Consistently contributing to your investment portfolio will allow you to take advantage of as dollar cost averaging, which makes the average cost per share of a stock lower than the normal average stock price. This allows you to build even more wealth, even if you are only able to invest small amounts at a time. For example, if you brought 10 shares at $5 each one month and the next month the share price has increased so you were only able to purchase 5 of the same shares for $10 each. Over the 2 months you purchased 15 shares for a total of $100, at an average price of $6.67, while the true average price is $7.50 ($5 +$10/2) over the long run this can become a significant amount.
Diversify Your Investments
Diversification is all about reducing risk by investing in wide range of investments! “Don’t put all your eggs in one basket!” You can do this by investing in different asset classes (shares, mutual funds and fixed interest) and across different industries (technology, healthcare and banking). That way, if something negatively impacts one sector, you have investments in other unrelated areas to reduce the market volatility.
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.