Updated: April 15, 2008
This is the last part of this article, to read the first part, click here: A Beginner’s Guide To Investing In Anything and Everything, Part 1.
You now have your emergency fund and determined your investment objectives. Likewise, your budget is ready and your acceptable level of risk has been defined. You are moving closer to choosing the investment instrument that’s just right for you. Personally, I believe that there is one more criteria that needs to be settled before you choose the instrument to invest in.
Step 5: How much time can you commit to your investment?
This is a common misconception among beginners, they think that after investing their money, they could just sit back, relax and wait for the money to grow. Investments, in general, do not immediately translate to passive income. Your active participation is required for it to become stable and profitable.
Therefore, you should determine how much of your time you can devote to studying and monitoring your investments. Remember that businesses experience lean and peak seasons and the money market fluctuates, if you are out of the loop when these things happen, chances are you won’t see your money back. Keep this in mind when you finally choose your investment.
Step 6: Is everything clear now why you’re investing?
After fulfilling the requirements that was asked in the previous steps, it’s now time to develop your personal investing mission statement. Write it down and read it before you make investment decisions. This helps you focus on your objectives and avoid being sidetracked into less optimum investments. Below are sample statements that could guide you:
I have P20,000 just sitting in my savings account which I want to invest for some extra income. I’m planning to use this money next year to pay for my vacation trip abroad so I’m only willing to invest in short-term, low-risk investments. I’m busy at work so I can commit only a few minutes a day to track my investments.
I want to finally quit my job so I need an investment that will help me accomplish that. I currently have P50,000 which I’m willing to invest in long-term and medium-risk investments. I’m hoping to leave the corporate world within two years, so I need my investment to give returns that can cover my expenses by that time. I’m willing to commit at least two hours everyday to study and monitor my investments.
It’s best that you write a draft of your mission statement and revise it for the next few days as you reevaluate and rethink your objectives and investment criteria.
Step 7: Is there an investment that can help you fulfill your mission?
We now come to the most important part of your journey to investing. Finally choosing the right investment instrument for you. By now, you probably have some candidates in mind but to give you more options, here’s a few more you can consider:
- Low Risk Investments: Bonds, Cash Deposits, Insurance, Mutual Funds, Treasury Bills
- Medium Risk Investments: Business Ventures, Multi-level Marketing, Mutual Funds, Real Estate, Stocks
- High Risk Investments: Business Ventures, Forex, Real Estate, Stocks
Why do some of the items repeat? Because the risk level of an investment can depend on its nature and your holding period. For example, doing short-term, speculative investing in the stock market is high risk but making a long-term investment in blue-chip stocks will give you low to moderate levels of risk. Do take note that the simplified enumeration above is incomplete. There are subtypes and alternative investments that exist which I encourage you to discover and learn.
Do your homework and find out everything about your chosen investment. If you can find an expert to guide you, the better. Remember that the less you know about an investment, the higher the risk of you losing money. Furthermore, the more control and power you have over it, the lower is the likely risk.
Step 8: Should you diversify your portfolio?
Most people would advise you to do so because spreading your investments in products with various levels of risks will hedge against losses. But if it’s your first time to invest, I advise you to choose just one and have fun with that first. You can always invest more when you are more adept about investing. Lastly, I advise you to do your transactions only with reputable investment firms and financial institutions. Be wary of fake brokers, fly-by-night firms and investment scams.
One last reminder before you start investing:
If you find yourself short of capital to invest in your preferred product, or you can’t find an investment that can fulfill your mission, then perhaps you should consider investing in knowledge. Put your money in books, training seminars and programs that will help you increase your financial literacy. This is a low-risk, high-profit investment you can immediately do today.
When you subscribe to Ready To Be Rich, you are actually investing in a zero-risk, high-yield investment. Join my reader’s list and invest in your mind.
Photo courtesy of scottwills.