Making your first investment can be a daunting task because of the large risk involved. The history of the global financial crisis and market crash saw many investors lose their hard-earned cash and since then, most of them hang up their boots and immersed themselves in less risky ventures.
Many studies show that Millenials and Generation Z are skeptical about investing. Interest rates have been climbing exponentially which leaves investors will little to no savings which could have serious long-term financial implications. For example, people who are saving for their retirement are likely to miss their target by half.
It’s not all gloomy though. There’s not a better time for investors than the present. The advancement in technology especially Artificial Intelligence and wealth managers has significantly reduced the risk of loss. What’s more, technology has opened up endless possibilities to invest in any part of the world. What happens when you’re a new investor and don’t know where to begin? Here is everything you need to know before making your first investment according to experts:
1. You should start investing as early as possible
Begin investing when you’re young because you’ll have more room to make mistakes which will make you wiser financially. You’ll also earn higher interest on your investment thanks to compound interest.
The stock market is like a roller-coaster which means that it’s hard to predict but when you invest young, you’ll have plenty of time to mitigate the losses and watch your money grow.
2. Make a budget of your first investment
The amount of money you invest will be determined by your investment goal and when you want to reach it. You also cannot invest in money that you don’t have and it’s therefore important you create an investment goal based on the amount of money you have at your disposal.
One common investment goal is retirement. If you have a retirement account such as 401k which offers matching dollars, your work is cut out for you. The general rule is to invest as much as you can so you can get earn the full match.
Financial analysts advise people to set aside 10 to 15% of their annual income towards their retirement. It may sound unachievable but as you make a deliberate effort to save, you’ll see that it’s quite achievable.
3.Open an Account for Your First Investment
If you don’t have a 401k account, you can invest for your retirement in a traditional account and watch your money grow. If you’re not investing for retirement, avoid retirement accounts entirely because there’s a limit to how much and when you can access your money. Instead, go for a taxable brokerage account which allows you to withdraw your money at any time.
There’s a misconception that you need to set aside a lot of money to open an investment account. This could not be any further from the truth. Some accounts allow you to invest as low as $500. What’s more, some of these accounts don’t require a minimum operating balance.
Also check out 6 Ways to Build Your Savings When You’re Low on Funds
4. Understand Your Investment Options
There are endless possibilities to what you can invest in including saving using a 401k account, using a taxable brokerage account, or even a traditional savings account. It’s important to understand the options that are available and how each of them works. Here are some investment options that are worth checking out:
They are also known as equities. Simply put, they are a share of ownership of a company. The cost of shares differs from company to company based on how profitable they are. Stocks are sold at a share price which can be a couple of dollars while some run into thousands of dollars.
Bonds originate from companies or governments and act as a loan to the originator. They are paid within an agreed time and the buyers earn interest. Bonds carry less risk than stocks because you know how much interest you’re going to earn. The only downside is that bonds earn lower returns in the long run and, therefore, should be considered as a long-term investment.
Mutual funds are a collection of investment options and may include stocks, bonds, and ETFs. This eliminates the need to choose your investments which may be a tedious process. They are a good option for your first investment because they are less risky than stocks.
Exchange-traded funds( ETFs)
ETFs work like mutual funds with many individual investments bundled together. The major difference is that ETFs are traded throughout the day just like stocks and are also bought at a share price.
One advantage of ETFs to mutual funds is that they are cheaper which makes it a viable first investment option for people working with a tight budget.
5. Pick an Investment Strategy
Your investment strategy is dependent on your savings goals and how much money you want to take to reach your goals. If your savings goal is long-term, say in the coming 20 years, you can invest in stocks or bonds. Deciding on which stocks to invest can be time-consuming and therefore, you can opt for ETFs, index funds, or mutual funds.
If you’re saving for a short-term and need money in a few years, it’s better to keep the money in an online savings account, cash management account, or low-risk investment portfolio.