Ready To Invest? Here's What You Need To Know

When you are ready to invest, we will need to know your goals, your budget, and your risk tolerance. We will also need to know your investing style and whether you prefer an active or passive approach.

It is important to understand the difference between investment types and asset classes, as well as the level of risk you are comfortable with. You should also consider the time you want to put into investing and whether you want to take a hands-on or more detached approach.

Additionally, we will need to know if you have any existing investments, such as a 401(k) or other retirement plans, and whether you have an emergency fund in place.

Assess your risk tolerance

When you are ready to invest, we will need to assess your risk tolerance. This is a crucial step in understanding your financial situation and balancing it against your goals and objectives. Here are some key considerations to help you assess your risk tolerance:

Time Horizon

The time you plan to stay invested is a significant factor in determining your risk tolerance. Generally, a longer time horizon is associated with a higher risk tolerance. Younger investors with a longer time until retirement are often considered more risk-tolerant and may be more inclined to invest in stocks and stock funds. However, it is important to note that age is not the sole determinant, as people are living longer and can remain aggressive investors well into their later years.

Financial Goals

Understanding your financial goals is essential in assessing your risk tolerance. Consider what you are saving and investing money for. If you are investing for shorter-term goals, such as a vacation, wedding, or down payment on a house, you may have a lower risk tolerance. On the other hand, if you are investing for longer-term goals, such as retirement or college education, you may be willing to take on more risk to achieve potentially higher returns.

Net Worth and Risk Capital

Your net worth and available risk capital play a crucial role in determining your risk tolerance. Net worth is calculated as your assets minus your liabilities. Risk capital refers to the money you can invest or trade without significantly affecting your lifestyle if lost. Individuals with a higher net worth and more liquid capital can typically afford to take on more risk.

Investment Experience

Your level of investment experience is another factor to consider. If you are new to investing or branching into a new area, it is generally advisable to proceed with caution. Gaining some experience and knowledge about the specific type of investments you are considering can help you make more informed decisions about your risk tolerance.

Risk Comfort Zone

Evaluating your comfort level with taking on risk is essential. All investments carry some degree of risk, and it is important to understand that you could lose some or all of your money. Assess how much financial risk you are willing to take and find a balance between maximizing returns and maintaining a comfortable risk level.

Diversification

Diversifying your investments can help reduce overall risk. By investing in different asset classes, such as stocks, bonds, and cash, you can lower the impact of market volatility on your portfolio. Diversification ensures that not all your investments are affected by the same market conditions, reducing the probability of total loss.

By considering these factors, you can gain a clearer understanding of your risk tolerance. This knowledge will guide your investment decisions and help you build a portfolio that aligns with your financial goals and tolerance for risk. Remember, it is crucial to assess your risk tolerance regularly, as your circumstances and goals may change over time.

Set clear investment goals

Setting clear investment goals is a crucial step in achieving financial success. It provides direction, motivation, and a sense of purpose in your financial journey. Here are some key points to consider when setting clear investment goals:

Define your long-term financial objectives

Start by identifying what you want to achieve in the long run. Do you want to buy a house, save for retirement, fund your children's education, or start a business? Having a clear vision of your long-term goals will help you prioritize your financial decisions and allocate your resources effectively.

Break down your goals into smaller, achievable milestones

Once you have established your long-term financial objectives, break them down into shorter-term goals that are specific and measurable. For example, if your long-term goal is to buy a house, your shorter-term goals could include saving for a down payment, improving your credit score, and researching mortgage options.

Make your goals SMART

Use the SMART framework to set effective goals:

• Specific: Clearly define what you want to achieve.
• Measurable: Quantify your goals so you can track your progress.
• Achievable: Set realistic goals that you can accomplish.
• Relevant: Align your goals with your values, priorities, and financial situation.
• Time-bound: Set deadlines to create a sense of urgency and track your progress.

Prioritize and review your goals

Determine which goals are most important to you and prioritize them accordingly. Regularly review and adjust your goals as your financial circumstances, priorities, and life situation change. This will help you stay focused and motivated.

Align your goals with your risk tolerance and investment style

Consider your comfort level with taking financial risks. Are you willing to take on high-risk investments with the potential for greater returns, or do you prefer lower-risk options with more predictable outcomes? Align your investment goals with your risk tolerance to ensure they are achievable and suitable for your needs.

Seek professional advice

If needed, consult a financial advisor or planner. They can provide valuable insights, expertise, and guidance tailored to your specific goals and risk tolerance. Their advice can help you make informed decisions and create a realistic plan to achieve your investment goals.

Choose your investment style

There are several different investment styles, and the right one for you will depend on your personal circumstances, preferences, and goals. Here are some of the most common investment styles:

• Active investing: Active investors are motivated primarily by a desire to generate higher returns in the near term. Day trading is an example of active investing. Day traders buy and sell securities throughout the day to try to capitalise on small market movements. Active investing may rely on technical analysis for decision-making, which involves identifying and tracking market trends to make educated guesses about which way a stock’s price will move next. Active investing can also refer to mutual fund investment styles, where a fund manager regularly buys and sells underlying securities to maximise performance.
• Passive investing: This is the opposite of active investing. Passive investors typically focus on the long term and look to match the market’s long-term returns rather than trying to beat them. They may purchase a core group of securities and invest in them regularly over time. Passively managed funds tend to have lower turnover and can trigger fewer capital gains tax events, resulting in lower expense ratios.
• Value investing: Value investors seek out undervalued companies, buy them, and hold onto them with the expectation that they will appreciate in value over time. The risk with this strategy is that you may encounter a "value trap", where a company appears to be undervalued but is not, and its stock price declines.
• Dividend investing: Dividend investors focus on generating dividends in their portfolios for income. A dividend is a share of a company’s profits paid out to shareholders. Companies that pay dividends tend to be older and more established. Dividend investors can choose to reinvest their dividends in additional shares.
• Growth investing: Growth investors are interested in companies with above-average growth potential. These companies typically reinvest all profits back into growth rather than paying out dividends. While investing in growth companies can be attractive due to the potential for significant gains, it can also be risky if the company does not perform as expected.
• Market cap investing: Market cap investing focuses on a company’s value, which is based on the number of outstanding shares issued and the price per share. Investors who use this strategy may focus on small-cap, mid-cap, or large-cap companies exclusively, or they may invest in micro-caps, penny stocks, or mega-cap companies. This strategy can offer different levels of risk and reward depending on the chosen market cap.
• Index investing: This is a type of passive investment strategy where investors put their money into investments that track the performance of a specific benchmark, such as the S&P 500 or the Russell 2000. Returns are based on gains or losses in the benchmark index.
• Buy-and-hold investing: This strategy involves buying and holding securities for the long term, allowing investments to grow in value over time. It is often considered a subset of passive investing and can be advantageous from a tax perspective, as holding investments for longer than one year can trigger a more favourable long-term capital gains tax rate.
• ESG investing: ESG stands for environmental, social, and governance. This investment style focuses on choosing investments based on sustainability, commitment to social causes, and good corporate governance.
• Factor investing: Factor investing uses different factors or characteristics to determine which stocks to invest in, including elements of other investment styles such as value, growth, and market capitalization, as well as momentum and market trends.

When choosing an investment style, it is important to consider your personal timeline for investing, investment goals and objectives, risk tolerance, and capacity for risk. You should also think about how hands-on you want to be with managing your portfolio, as some investment styles require more active involvement than others.

Create an emergency fund

Creating an emergency fund is an essential step to take before investing. An emergency fund is a cash reserve that's set aside for unplanned expenses or financial emergencies. It's recommended to have three to six months' worth of living expenses saved in an emergency fund, though some suggest that nine to twelve months is more appropriate for those with variable incomes.

The amount you need to have in an emergency fund depends on your situation. Think about the most common unexpected expenses you've had in the past and how much they cost. This will help you set a realistic goal for your savings.

• Create a savings habit: Set a specific goal for your emergency fund and consistently put money aside to work towards it.
• Manage your cash flow: Track your income and expenses to identify opportunities to adjust your spending and savings.
• Take advantage of one-time opportunities to save: Save all or a portion of any large sums of money you receive, such as a tax refund or cash gift.
• Make your saving automatic: Set up recurring transfers from your checking account to your savings account so that you're consistently contributing to your emergency fund.
• Save through work: If you receive your paycheck through direct deposit, ask your employer if it's possible to divide it between your checking and savings accounts.

It's important to keep your emergency fund in a safe and accessible place. Consider keeping it in a high-yield savings account or a bank or credit union account.

Remember, an emergency fund is crucial for financial stability and peace of mind. It will help you cover unexpected expenses and prevent the need for high-interest credit cards or loans.

Diversify your investments

Diversifying your investments is a crucial part of any investment plan. The idea is to spread your investments across different vehicles to reduce risk and target higher returns. Here are some tips to help you diversify your investments:

Spread the Wealth

Don't put all your eggs in one basket. Diversification is about investing in a variety of assets and industries. Consider investing in a handful of companies you know and trust and even use in your daily life. You can also invest in commodities, exchange-traded funds (ETFs), and real estate investment trusts (REITs). Think beyond your home country and invest globally to spread your risk and potentially achieve bigger rewards.

Consider Index and Bond Funds

Index funds and fixed-income funds are excellent additions to your portfolio. These funds track various indexes and aim to match the performance of broad indexes like the bond market. They provide wonderful long-term diversification and hedge your portfolio against market volatility. Index funds also typically have low fees, putting more money back in your pocket.

Keep Building Your Portfolio

Continuously add to your investments over time. A strategy called dollar-cost averaging can help smooth out market volatility. With this approach, you invest the same amount of money regularly, buying more shares when prices are low and fewer when prices are high. This reduces your overall investment risk.

Know When to Get Out

While buying and holding, and dollar-cost averaging are sound strategies, it's important to stay informed about your investments and the overall market conditions. Keep an eye on the companies you invest in to know when it's time to cut your losses and move on to your next investment.

Keep an Eye on Commissions

Be mindful of the fees you're paying, whether monthly or transactional. While some online brokers now offer $0 commission-free trading for many stocks and ETFs, trading mutual funds, illiquid stocks, and alternative asset classes often comes with a fee. Ensure you understand what you're paying for and if there are any changes to your fees.

Other Tips:

• Don't Forget Cash: Cash is often overlooked, but it can provide protection during market downturns and give you optionality to take advantage of future investment opportunities.
• Target-Date Funds: These funds automatically adjust your portfolio allocation based on your chosen investment goal, making it easier to maintain a diversified portfolio.
• Periodic Rebalancing: Strong performers in your portfolio will grow in weight over time, while poor performers will decline. Rebalance your portfolio occasionally to maintain the appropriate weight for each investment and stay on track with your diversification strategy.

Frequently asked questions