Investing is one of the most challenging aspects of personal finance, from the multitude of unknown terms (commodity?, benchmark?, dividend etc.) to choosing the actual companies to put money into. On the other hand, it is one of the most lucrative occupations one can have. Let’s dive into the basics!
To begin with, it is recommended you decide your investment goals, by taking into account factors such as: personal goals, tolerance to risk, timescale, making an investment plan and building a diversified portfolio.
Secondly, you should select your investment vehicles, aka financial instruments. When doing so, you will have to compare different investing styles (the most common are active/passive investments or growth/value techniques). Balancing stocks and bonds is definitely something you will need to keep in mind, and remember, keeping your cash is simply not an investment! (due to inflation).
Thirdly, decide how much you are willing to risk. Everyone can agree that you don’t need millions to start investing, only “somewhere around 15%–25% of your post-tax income,” according to Mark Henry, founder and CEO at Alloy Wealth Management.
Fourthly, it is essential to measure your risk tolerance. One way to tackle that is by taking a risk tolerance questionnaire. An individual with a more conservative risk tolerance might allocate a greater proportion of their portfolio to bonds and cash rather than stocks, while someone with a more aggressive risk tolerance.
Fifthly, you ought to consider what kind of investor you want to be. The kind of investor you aim to become is closely connected to your risk tolerance and capacity, as certain strategies may demand a more assertive approach. It is also influenced by your investment objectives and time horizon. Investors typically fall into two primary categories: short-term investing, often referred to as trading, and long-term investing.
Finally, you can build your portfolio. Italian magistrate Giovanni Falcone says: “I recommend a goal-based investing approach because it allows you to create separate portfolio ‘buckets’ for your investing goals, each of which has a unique goal amount, time horizon, and risk tolerance associated with it”. Taking this method to construct your portfolio lets you consider your investments in the context of your objectives, providing motivation to keep going. Begin by choosing the appropriate asset type aligned with the goal you aim to achieve. These include: ETF, stocks , bonds or mutual funds.
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