Once you’ve decided you can afford to start investing, putting away your hard-earned money to hopefully grow in size, you’ll first need to ask yourself three questions.
Investing is an activity that can be undertaken in the short or long term and has variable amounts of risk associated with it. You need to understand what those risks are and decide how you feel about them. this, in turn, will guide you towards the type of investment you should make, not necessarily the type you WANT to make. (The Gordon Gecko was just a fictional character, after all, right?)
So Question 1: How long do you want to invest this money for?
Now I know this sounds like a fairly simple question, but the answer is important because it determines the level of return you can expect on your investment, as well as partly determines the amount of risk you can take. Don’t forget one of the golden rules of investing! You see it mentioned in every ad, but it’s important: the value of your investment can go down as well as up.
If you decide to invest over a long period of time with money that you can afford to put away and go, then the stock market is ideal. Although it has its ups and downs, just like any other business, it tends to balance out over a sustained period of time and makes a healthy profit to boot.
But if you can only invest for, say, 3 or 5 years and you put your money in the stock market, what if the market crashes just before you plan to sell your stock and take the money? Markets DO go down and it is much more common for that to happen to you at just the wrong time. After 20, 25, or 30 years, it’s usually not a problem, since your assets have grown over a long period of time. But in a short period of investment, it is unlikely that you will have much profit to play with.
If you can invest for the long term, go to the stock market. If you’re short, consider money market accounts or even bonds, the safest but usually not as profitable.
Which brings us perfectly to
Question 2 – How much do you want to earn?
A simple counter for this question is to think of it as a percentage. “If I invest $10,000 for 10 years, I want to see a 15% return!” Now that’s $1,500, giving you a total sum of $11,500. It’s not a huge earthquake, but the amount you want to earn, the percentage return you expect is directly proportional to the amount of ‘risk’ you need to take. (Note I put risk in ‘ ‘ marks then? No investment is 100% sure cast iron! Oh, did I mention that? Sorry!)
We all dream of being the one to buy a penny stock and find out that a year from now you will become the next Microsoft or Google! But it rarely happens. Yes, I know it can happen, but rarely. Look, if you’re going to invest your hard-earned money, make sure you have your regular glasses on when you look into the future, not the pink ones, okay?
If you’re not willing to take a risk, opt for bonds or money market accounts.
If you can afford to ‘play’ a bit, then the stock market may work for you.
Once again, almost creepily, that brings us to the next question which is
Question 3: What level of risk would you consider acceptable?
Now you’re not expected to be Gordon, mocking losing $30 million a week when you just made $60 million. But you also shouldn’t be reviewing his investments, his stock values every day and panicking, questioning your own decisions every day.
Think of investing as a long-distance trip and your return is the final destination. At what point on the road does the trip start? Are you near the beginning, that is, fairly young, with no real commitments or obligations? Then you can afford to bet more, much more than someone approaching retirement age and counting on your investments and earnings to secure your years when you don’t earn a regular income.
So what happens if you join the ride right in the middle, you say? Easy: Do as I did, divide your total available investment amount roughly in half and invest half in areas of low risk and low return and half in areas of higher risk and higher potential return.
I’m still smiling anyway.
Important Note:- Investing your money is serious business as your future happiness may very well depend on it. Although the information contained here is good (of course) it is not and should not be considered professional advice. In other words, if you sell your house and put all your money in hedge funds and lose the lot, don’t blame me, okay? Instead, seek the advice of trade-approved professional advisors who will be able to show and guide you more than an article or two on the internet can!
