Investing can seem like a complicated process, but the best way to make sure your money is working for you is to do your research and make informed decisions. Here's how.
Before we begin
This is a general guideline that we have put together to help you start your journey of financially planning your future and should not be taken as financial advice. Although these points are great starting points, speaking to a financial adviser will make finding the right fit easier for you.
Where do you start?
The first step in building a portfolio is to set a specific vision. You'll want to answer these questions:
Once you've answered these questions, it's time to evaluate your current assets and liabilities. For most people, this will mean checking their bank accounts and savings accounts or credit cards. It's important to know what funds are available before deciding on the next steps of creating an investment strategy. You can also speak to an accredited financial planner or asset manager to find a solution that is suitable for your finances.
What are you investing for?
You need to know what you're investing for.
If you're investing to pay for a child's education, that's different from saving up to buy a house. Your time horizon is longer and your risk tolerance might be lower since the money isn't going anywhere. On the other hand, if you're planning on retiring early, then stocks are more likely going to be part of your portfolio because their growth potential can help offset their high risk profile compared with bonds or cash equivalents (like CDs).
Your current financial situation also matters when deciding how much to invest. If you've got plenty of money saved up already and want to invest in something risky like stocks after taxes are paid, then go ahead. But if this money represents all or most of your savings and would leave little left over if something happened (like losing your job), then having a more conservative investment strategy is probably better for now until things stabilize again financially.
How much risk can you tolerate?
How much risk you can tolerate is a personal decision that should be considered before you start investing. Risk tolerance is the degree to which an investor feels comfortable with uncertainty, volatility and loss. It's based on your ability to handle loss, but it also depends on other factors like age and income level.
Risk tolerance isn't the same thing as investment style, though some people use those terms interchangeably. An investor with a conservative or defensive style might want to reduce their exposure to risk when making decisions about their portfolio: for example, by choosing mutual funds instead of individual stocks or bonds; by choosing low-fee index funds over more expensive actively managed funds; or simply by waiting until they're older before starting their retirement savings plan (which gives you more time for compound interest).
Do you understand the tax implications of each investment choice?
Before you put your money where you interests are, make sure that you understand the tax implications that may come with it as this can affect your investments when it is time to cash-out. Tax laws are complex and constantly changing so it is important to seek professional advice when making an investment decision with significant tax implications.
