It is generally accepted that if you want to be able to grow your wealth more effectively — especially if you want to retire some day — you need to invest your funds rather than sticking them in a checking or savings account. However, before you invest, it is a good idea to take stock and consider your options. Think these three issues through as you prepare to take the investing plunge.
What Do You Know?
One of the first rules of investing is to avoid investments you don’t understand. What do you know about how the investment works? If you want to invest in stock funds, it helps first to understand how stocks work, and how mutual funds operate.
The good news is that many of the more “standard” investments that most people take advantage of — stocks and bonds — are fairly easy to understand. Understanding funds, including mutual funds and exchange traded funds, isn’t much of a stretch beyond that. These are good places to start, since you can learn about them quickly.
You can move on to more complicated investments as your knowledge increases. Don’t forget to learn about the specific investment you are looking at. Before choosing a bond, stock, or mutual fund, do some research. If you want to invest in energy futures, you not only need to learn about how futures are traded, but you should also look at the characteristics, market movements, and fundamentals associated with the types of energy investments (oil, coal, solar, etc.) you are interested in.
What’s Your Risk Tolerance?
Before you start investing, consider your risk tolerance. As you might guess, this is a measure of how much risk you can stand. There are two types of risk tolerance:
- Financial: This represents how much money you can afford to lose. Don’t invest money that you can’t do without.
- Emotional: In some cases, the high volatility of certain investments causes you disquiet. Not only do you need the financial risk tolerance, but you also need the emotional risk tolerance. While stepping a little outside your comfort zone might be warranted, don’t invest in something that you are really nervous about. Other aspects of your life will suffer as your anxiety takes over.
Where Should You Invest?
The next thing to think about is where you will invest. There are a number of brokers out there. Many people like to use online discount brokers. These can be helpful if your needs are fairly basic, and you are comfortable with the amount of research you do. A full service brokerage might be needed for someone with more complex needs. Also, consider the cost of investing. Take into account transaction fees and commissions, as well as the service you get.
Before you open an investment account, make sure the broker offers the services you want, and that the prices are reasonable. Remember that the fees and commissions you pay are eating into your returns. You want to keep these as low as possible. Investing can be a great way to build wealth, no matter what you are interested in. However, doing a little recon before you start will help you make better, more informed decisions.