Many people avoid investing tips as they tend to believe they don’t have the money to begin investing. The truth is, you can start investing on any income with very small amounts of money. The object behind investing is to potentially increase the amount of money you began with, so that you receive more in the end that you originally put in.
Before you begin, remember that there are no set rules when it comes to investments, just as there are no guarantees that you’ll get the returns you hoped for. However, there are some ways to help you make informed choices so that your money is working for you, rather than you working for your money.
Here are some top investing tips to help get you started:
1. Understand Why You’re Investing
Ask yourself why you want to invest your money and what your ultimate goals will be. When you have a clear understanding of why you want to get into investing, it can be much easier to formulate a strategy to get you there.
You might decide you want to begin saving for retirement or add to existing savings. You might simply want to create some cash flow from passive investments such as dividend payments or rental income. You could be aiming at wealth creation strategies to increase your net wealth over the longer term.
Whatever the reason, be clear about your goals and you’ll find it much easier to focus on strategies to get you there.
2. Understand the Markets
There are many viable markets in which to invest and each of them will have different levels of return as well as different inherent risk factors. Before you put your money into any form of investment, take a little time to educate yourself about how the markets you’re thinking about work and how the returns will be generated and distributed. This can help you to make more informed decisions about where to put your money.
3. Understand the Types of Returns
There is no single easy way to choose the right investment for you. Different people will have very different risk aversion levels, in the same way that different investors will also have different goals and objectives.
Money invested into a term deposit might earn interest on your savings, while stocks can pay dividend payments to shareholders and real estate investments can yield rental income.
Aside from these, many investments can also benefit from capital growth, such as an increased value of a stock in a rising stock market, or the increased value of a property in a rising real estate market.
4. Understand Risk Management
As a general rule of thumb, investments that offer higher-than-normal returns often carry much higher risks while investments yielding lower returns can be somewhat lower risk.
Depending on your particular investing strategy, you might want to aim at opportunities that offer lower yields and lower capital growth rates, but are more likely to be safer places to park your money.
5. Understand the Asset Classifications
Many investment tips advise people to diversify their investment portfolio. It makes good sense to spread your risk across more than one market to give you a buffer against anything going wrong, almost like not putting all your eggs in the same basket.
You might decide to spread your investments over lower risk assets, like term deposits or bonds that yield a slightly lower return but also offer less risk than some other investment opportunities.
You could also decide to put a portion of your investment money into stocks, ETFs (like a natural gas ETF, for example) or into real estate to diversify your portfolio across other markets. This can help your total investment value by earning a dividend or rental income for cash flow, as well as increasing the total value of your investment with capital growth over the long term.
6. Understand How Much You Can Afford to Invest
Many investing tips focus on how and where to invest your money, but there is little sense in trying to earn an investment yield of 5% or 6% if you’re paying 18% in interest on credit card balances.
Get into a habit of paying more than the minimum payments on any outstanding debts you have and reduce your consumer debts as quickly as possible. These are things like credit cards, store cards, personal loans, car loans and any other loan that doesn’t help you to build up your investment value.
When your consumer debts are cleared, continue putting that same amount of money away into a separate savings account to build up as your investment seed money.
7. Understand Gearing for Growth
Many investors want to fast-track their investment returns, so they might be tempted to take unnecessary chances on high risk investments just to aim at the higher returns promised. This isn’t always necessary in order to increase your asset-base, especially when you understand how to use the power of leverage to your advantage.
Borrowing money against your investment in order to increase the amount you have invested is often called leverage, or gearing. For example, in order to buy an investment property, a bank will gear your property up to an agreed loan-to-value ratio (LTV). This will become your investment loan and help you to purchase an asset that you otherwise wouldn’t have been able to afford.
In much the same way, banks may also allow some investors to gear against their stock portfolios using a margin loan. This is where the lender will allow you to borrow up to an agreed LTV against the value of the stocks you own in order to buy more stocks.
Gearing can be extremely risky for investors who don’t fully understand how to protect themselves against any losses and minimize the inherent risks of borrowing money to enter an investment market.
These investment tips should hopefully give you a basic understanding of some things you should consider before you invest your money into any opportunity you find. Always take a little time to educate yourself about where your money is going and what could happen to it before you make a decision.
Also check out our investment guide to see what kind of investing personality you have.