Investing for the first time can seem a rather daunting step. You may not know the difference between a share, bond or fund, let alone which one could be right for you.
Then there are all the acronyms such as FTSE, PE ratio, VIX, Eurostoxx and so on. Yet for most, investing — as opposed to saving cash in the bank — is a vital part of any financial planning exercise. It offers the chance of higher returns, giving better opportunities to build wealth to fund medium- and long-term goals.
Investing wisely is about careful planning, not gambling. Therefore this article provides some helpful tips for first time investors.
Prepare your personal finances
A good grip of your finances is an ideal place to start, answering the questions that not many people actually know the answer to. How much do you earn? How much do you spend? How much do you have in cash, and how much do you need in cash?
Bear in mind that investments are long term. If you have credit cards, make sure you have paid them off. Investment services often provide structured advice to build and preserve wealth over the long term, understanding what it takes to pave the way for successful investments.
Investment risk and reward
The next thing is to understand the risks and the returns of various types of investment, remembering that returns can be negative as well as positive. Clients of skilled investment advisers benefit from the combined experience of financial planners, who understand their attitude to risk, and in-depth analysis by investment researchers. Once you have done this, you can start to think about what kind of investor you are and which investments might be most suitable for you.
Clarify your investment objectives
Why do you wish to invest? What are you trying to achieve and over what time frame? Sometimes cash is the best investment if you have a shorter and clearly defined objective, like building a deposit for a house you want to buy in two to three years.
Many new investors appreciate a personal approach, so it may be important for you to find an investment adviser that works hard to understand your objectives and review your investments.
Diversification: key to successful investment
You should aim to hold a range of investments, known as diversification. This means your money is invested in many different types of assets, countries and industry sectors with a low correlation to one another.
The stock market often reacts in an exaggerated manner. It can move sharply from day to day. Staying calm sounds easy, but it can be much more difficult in reality. This is why skilled investment advisers constantly seek to utilise a straightforward and sensible investment process.
Phasing your money into investments
If you do not invest all your money in one go but invest over a period of time into an investment portfolio, you can reduce the risk of losses. On the other hand, you may not get all the returns, but erring on the side of caution is always wiser than letting greed take over.
Taking profits and cutting your losses
Should you face the scenario where a fund is performing well, you should consider taking profits. It is all too easy to be greedy and keep a high-risk fund just because it is making gains. On the other hand, if a fund is not performing as you had hoped you may wish to consider cutting your losses.
TLC: Transparency, liquidity and cost
High costs erode investment performance. Make sure you know all the fees at the beginning, as well as the ongoing fees, and that there are no exit penalties. Costs can therefore be kept to a minimum at all times.
…get all your advice in writing.