Unlocking Investment Opportunities: Strategies For Securing Funds

Investing is a great way to build wealth over time, but it can be intimidating for first-time investors. Before investing, it's important to determine your budget and risk tolerance. You'll also need to decide whether to take an active or passive approach, which will influence the amount of time and research required.

If you plan to be an active investor, you'll need to put in the time and effort to research and analyse stocks. You'll also need to understand the basics of stock analysis. On the other hand, passive investing requires less time and effort, as you can invest in mutual funds or exchange-traded funds (ETFs) that are managed by professionals.

When it comes to funding your investments, there are a few options. You can use your savings or consider taking out a loan, but make sure you have a solid financial foundation and an emergency fund in place first. It's also important to get rid of any high-interest debt before investing.

There are a variety of investment accounts to choose from, including regular brokerage accounts, retirement accounts, and managed accounts. When choosing an account, consider the tax implications, account fees, and minimum investment requirements. It's also important to select a reputable broker that offers the tools, resources, and support you need.

By following these steps and doing your research, you can make informed investment decisions and work towards achieving your financial goals.

Determine your risk tolerance and investment style

Risk tolerance is the degree of risk that an investor is willing to take on, given the volatility in the value of an investment. It is an important component in investing, as it often determines the type and amount of investments that an individual chooses.

An investor's risk tolerance is influenced by their age, investment goals, and income. For instance, an aggressive investor commonly has a higher risk tolerance and is willing to risk more money for the possibility of better, yet unknown, returns. On the other hand, a conservative investor commonly has a lower risk tolerance and seeks investments with guaranteed returns.

Investment Goals

The first step is to understand why you are investing. Common investment goals include saving for retirement, paying for a child's education, or achieving financial independence. Knowing your investment goals will help you determine how much risk you are willing to take. For example, if you are investing for retirement, you may be more comfortable taking on more risk, as you have a longer time horizon.

Time Horizon

Your investment goals will help establish your time horizon, which is when you plan to use the money you've invested. Generally, a longer time horizon allows you to take on more risk, as you have time to recover from potential downturns. Conversely, a shorter time horizon may require a more conservative approach to ensure you meet your financial goals.

Comfort with Short-Term Loss

Investments can fluctuate in the short term, and it's important to remember that with stocks and similar investments, your shares may decline in value. If you need your money in the near term, you may be forced to sell at a loss. Investors with a longer time horizon can hold on to their investments, hoping they will recover and potentially increase in value over time. Therefore, it's crucial to assess your ability to absorb short-term losses within the context of your goals and time horizon.

Presence of Non-Invested Savings

It is essential to have some savings set aside in liquid accounts, regardless of your risk tolerance. This emergency fund will ensure that you can easily access cash in case of unexpected expenses or financial setbacks. However, if you are keeping a large portion of your savings in cash due to anxiety about investing, it may indicate that you are risk-averse.

Investment Tracking Behaviour

Consider how closely you plan to monitor your investments. If the idea of market fluctuations makes you anxious, a diversified portfolio focused on long-term goals can help make downturns more manageable. On the other hand, if market volatility excites you and motivates you to seek new investment opportunities, you may be more comfortable taking on more risk.

Risk Capacity

While determining your risk tolerance, it is essential to distinguish it from risk capacity. Risk tolerance measures your willingness to accept risk, while risk capacity refers to your financial ability to take on risk. Factors such as job stability, caretaking duties, income, savings, and time horizon all contribute to your risk capacity. It's crucial to ensure that your risk tolerance aligns with your risk capacity to make informed investment decisions.

Decide how much you can afford to invest

Before you start investing, it's important to determine how much you can afford to invest. This step ensures that you are investing responsibly without endangering your financial stability.

• Review your income sources: Begin by listing all your sources of income. Check if your employer offers investment options with tax benefits or matching funds to amplify your investments.
• Establish an emergency fund: Ensure you have a solid financial foundation before investing. This fund should cover a few months' worth of major expenses, such as mortgage or rent payments and other essential bills.
• Pay off high-interest debts: Financial planners typically recommend paying down high-interest debts, such as credit card balances. The returns from investing in stocks are unlikely to outweigh the costs of high interest accumulating on these debts.
• Create a budget: Based on your financial assessment, decide how much money you can comfortably invest in stocks. You also want to know if you're starting with a lump sum or smaller amounts over time. Your budget should ensure that you are not dipping into funds you need for expenses.
• Only invest money you can afford to lose: Never put yourself in a financially vulnerable position for the sake of investing.

It's important to remember that investing in stocks or other financial instruments involves a certain level of risk, and you should only invest an amount that you are comfortable with and that fits within your financial plan.

Choose an investment account

There are several types of investment accounts, each with its own purpose. Here are some of the most common ones:

• Standard brokerage account: This is a taxable brokerage account or non-retirement account that provides access to a broad range of investments, including stocks, mutual funds, bonds, and exchange-traded funds. You can open this account as an individual or jointly with someone else. There are no limits on contributions, and money can be withdrawn at any time, but you may owe taxes on gains.
• Retirement accounts: These include traditional and Roth IRAs, as well as accounts for small-business owners and the self-employed, such as SEP IRAs, SIMPLE IRAs, and Solo 401(k)s. IRAs offer tax advantages, such as upfront tax breaks or tax-free withdrawals in retirement. However, there are income limits and early withdrawal penalties for certain types of IRAs.
• Investment accounts for kids: Examples include custodial brokerage accounts, such as UGMA and UTMA accounts, which allow adults to gift money to minors. There are also Roth and traditional IRAs for children with earned income. These accounts offer tax advantages and can be used for various purposes, including education expenses.
• Education accounts: Such as 529 savings plans and Coverdell Education Savings Accounts (ESAs), which can be used to pay for college and other education expenses. Contributions are not tax-deductible, but qualified distributions are tax-free.
• ABLE accounts: These are similar to 529 accounts but are designed for individuals with disabilities. They offer tax advantages and protect beneficiaries from losing access to public benefits such as Medicaid.

When choosing an investment account, consider your goals, eligibility, and account ownership preferences. Additionally, it's important to assess the risks associated with each type of account and determine which ones align with your risk tolerance and financial situation.

Understand mutual fund fees

Mutual fund fees can be broadly categorised into two types: annual fund operating expenses and shareholder fees.

Annual Fund Operating Expenses

These are ongoing fees charged for the cost of paying managers, accountants, legal fees, marketing, and the like. These fees are typically between 0.25% and 1% of your investment in the fund per year. Actively managed funds tend to be more expensive than passively managed funds.

To find these costs, look for the fund's "total annual operating expenses" in the prospectus, a legal document that each mutual fund is required to file with the SEC. Listed ongoing costs may include:

• Management fees: The cost of paying fund managers and investment advisors.
• 12b-1 fees: Fees capped at 1%, which cover the cost of marketing and selling the fund, and other shareholder services.
• Other expenses: These may include custodial, legal, accounting, transfer agent expenses, and other administrative costs.

Shareholder Fees

These are sales commissions and other one-time costs when you buy or sell mutual fund shares. These fees are outlined in the "Shareholder Fees" section of the fund's prospectus. They may include:

• Sales loads: Commissions paid to third-party brokers when you buy or sell shares. These are either front-end loads, paid at the time of purchase, or back-end loads, paid at the time of sale.
• Redemption fee: Charged if you sell shares within a short period of buying them.
• Exchange fee: Charged by some funds if shareholders transfer their shares to another fund offered by the same investment company.
• Account fee: Charged by some funds for maintaining accounts, often if the balance falls below a specified minimum investment amount.
• Purchase fee: Charged by some funds at the time of purchase, paid to the fund (not to a broker) to defray costs associated with the purchase.

It is important to note that even if a mutual fund does not charge sales loads, it may still charge redemption, exchange, account, and purchase fees.

Load Funds and Mutual Fund Share Classes

Sales loads are assessed based on the "class" of shares purchased:

• A-class shares: Carry a front-end sales load, typically between 2% and 5% of the total investment.
• B-class shares: Carry a back-end sales load, also known as a contingent deferred sales charge (CDSC), which is charged if shares are sold before a specified time period, usually up to seven years after the original purchase. B-class shares typically have higher ongoing annual fees than A-class shares.
• C-class shares: May carry commissions charged annually or a back-end sales load similar to B-class shares.

No-Load Funds

No-load funds do not charge any type of sales load. However, they may still charge purchase fees, redemption fees, exchange fees, and account fees, which are not considered sales loads.

Impact of Mutual Fund Fees on Returns

Even small differences in fees can significantly impact your investment returns over time. For example, a $10,000 investment with a 5% annual return and annual operating expenses of 1.5% would result in roughly $19,612 after 20 years. However, if the expenses were only 0.5%, the final amount would be $24,0002, a 23% difference.

Therefore, it is crucial to understand the fees associated with mutual funds and how they can impact your returns over time.

Set up automatic contributions

Setting up automatic contributions is a great way to ensure you are consistently investing towards your financial goals.

Dollar-cost averaging is a strategy that involves investing a fixed amount of money at regular intervals, regardless of the market's performance. This strategy helps to reduce the risk of making emotional investment decisions based on short-term market news.

• Determine how much you can afford to invest: Assess your financial situation and decide on an amount that you can comfortably invest on a regular basis. This amount should be based on your income, expenses, and other financial commitments.
• Choose the frequency of your contributions: Decide how often you want to make contributions, such as weekly, bi-weekly, or monthly. Align the contribution frequency with your income schedule to ensure you have sufficient funds available.
• Select the investment account: Choose the investment account or accounts to which you want to make automatic contributions. This could be a brokerage account, retirement account, or another type of investment vehicle.
• Set up the contributions with your financial institution: Contact your bank or financial institution and provide them with the details of your selected investment account. You may need to fill out some paperwork or set up an automatic transfer or direct deposit to the investment account.
• Monitor and adjust as needed: Regularly review your automatic contributions to ensure they align with your financial goals and risk tolerance. You may need to adjust the contribution amount or frequency over time as your financial situation changes.

By setting up automatic contributions, you can take a more hands-off approach to investing while still working towards your financial objectives. This strategy helps remove emotions from your investment decisions and ensures consistent progress towards your goals.

Frequently asked questions