Everyone needs a hobby. Some like to play sports or games; others enjoy art or music. These days, however, many have begun investing as a hobby.
1. Ensure you can afford investing as a hobby
Because investment is all about money, it’s easy to forget the real cost if you are making investments for your own amusement. If you are investing for fun, make sure you are not playing with more than you can afford to lose. Most hobbies cost money, but it’s very important to make sure that things don’t spiral out of control if they are not going your way. Know your limits and your budget in advance — and then stick to those parameters rigidly. Avoid leveraged accounts or anything with unlimited potential losses.
2. Don’t try to run before you can walk
Understand that you are a beginner. As with any profession or skill, investing can look easy to the outsider — watching the Wimbledon finals makes tennis look simple, for example, but once you pick up a racket you realise that is not the case. Investment markets can be complex to understand, and there is no secret formula. Small investments into simple markets can be fun and exciting without risking your savings or damaging your long-term financial plans. If you don’t have any long-term financial plans in place yet, you probably shouldn’t be thinking about investing “just for kicks!”
3. Learn the basics before you invest your money
You wouldn’t join in a rugby match without learning the rules, and you certainly wouldn’t try skydiving after watching a how-to video on YouTube. Before you decide to put your hard-earned cash into any market, figure out the different options open to you and make sure you are familiar with the rules and structure. There is an awful lot of jargon in the financial world, and regulations can be difficult to understand — especially if you’re an expat in a country whose language is not your own. What might seem very simple in the first place — a simple ‘click here to start your very own trading account’, for example — could have hidden risks, costs and pitfalls.
4. Know the risks of investing for beginners
Be wary of trading services that offer you a dummy account or play-money to start with. They are often designed to put you into the mindset that risks and losses don’t matter. Every investment carries some element of risk, but they vary hugely and are amplified by someone who doesn’t know what they are doing.
A novice investor sticking to low-volatility, low-risk assets could easily lose all their money on transaction charges by trading too frequently. The same investor could lose everything in a volatile market by not trading often enough or failing to monitor the market, which can change in a moment. There’s a good reason that investing is a full-time job for many people.
Different kinds of investments will carry their own risk profiles. Investing in managed funds can be stable and predictable, but is best for sensible financial planning as a team of professionals is making the day-to-day decisions. Many hobby investors choose to invest in spreads, pairs, currencies or CFDs (contracts for difference). These trades can move very quickly, so they might be exciting but carry extremely high risk — and you can even lose more than was originally invested.
5. Seek investment advice (from the right place!)
These days it seems that everyone has investment tips and tricks. If you’re only risking two or three euros, then you might not be too concerned about the quality of the trade, but if someone is trying to tell you how to run your portfolio, ask yourself a few questions.
First, are they an expert or professional? If not, should you really be taking their advice? If they were really that good at investing, they would probably be doing it for a living. Second, are they telling you about something that has already happened? Many people offer second-hand advice and anecdotes about what worked for them or someone they know in the past. Following this can be a terrible plan. Investing in yesterday’s success is usually a waste of time and money.
I speak to my clients frequently about goal-based investing and not mixing your plans. There is no reason why having fun and learning about the investment market shouldn’t be a target all of its own, just as long as it is a small part of your holistic financial planning.
If you’re interested in learning more about investing as a hobby, speak to your financial adviser about the best way to start investing. Once you have your financial goals in place and your long-term investment strategy laid out for the money you will need, it may even help you understand more about how your money can work better for you.
Edward Mainwaring-Burton, international financial adviser, Blacktower Financial Management / Expatica