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If you have been working for some time, you probably have accumulated some form of savings, and the first mistake we don't want to make is to let the money stay idle.
Imagine your current savings like a little plant, you need to constantly give it nutrients and provide the right conditions for growth to take place. Hence, if you are someone who always place your savings under a normal saving account in a bank, it is time to relook at other alternative forms to grow your money - better and faster.
One approach is through Investment. Sounds like a taunting term, and one which many people do not understand and hence never got the chance to take the first bold move.
Today, I will be sharing with you an Introduction Guide to Investment, and hope to build up your knowledge and confidence in this field to take the right decisions.
What is Investing?
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1) Investing involves the purchasing and selling through financial tools including stocks, bonds, options, certificates, and more.
2) Investing can be done through financial advisors or personally, although financial advisors will charge you additional fees for their services, but they could be valuable sources of information and help.
3) Investing can be easily performed at home with a computer with an internet connection.
How to start Investing?
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To start investing, you must have surplus cash. Rule of thumb: You should have at least 3 months of liquid cash - i.e: ready cash to tide you over in terms of emergencies.
Given the tons of different stocks and mutual funds in the market to choose from, it is essential to follow a few methologies to ensure better selection and return on investments (ROI) in the long run.
3 Simple Investment Methologies
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1) What to buy?
2) When to buy?
3) When to sell?
What stocks or funds to buy?
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The entire market consists of over 10,000 stocks, so how can we narrow down our selection to the elite stocks, and make the right buying decisions? Luckily, we have indicators such as the Dow Jones Industrial Average, the S&P 500, and the Wilshire 500 among others on the New York Stock Exchange.
The Dow JOnes reflects the average stock prices of top 30 largest companies.
The S&P 500 reflects the average stock prices of top 500 companies, representing companies that are worth 75% of the entire stock market value.
The Wilshire 5000 reflects the average stock prices of top 7000 companies.
One proven worthy strategy is through index funds, i.e invest in the indicators itself. There exists a special mutual fund which is made up of all 500 stocks in the S&P 500. This means that only are you investing in the top companies, you are also diversifying and lowering your risks, and maximizing your potential gains in the future, given the proven track records of these companies in order to be listed in the S&P 500.
What about those professional managed funds? Are those worthy of consideration? See below for clear advantages of index funds over those professional managed mutual funds.
Index funds
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Lower costs, 0.2 percent
Low transaction fees
Lower tax
Low portfolio turnover
Professionally Managed Funds
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Higher Cost, >2%
Higher transaction fees
Higher Tax
Higher portfolio turnover due to higher risk
Hence, for a starter to investing, the safer and obvious approach is to invest in index funds given the lower costs, higher stability, and proven good past performance records.
Are you going to trust the financial advisor and give him your hard-earned money, for them to give you false promises of high returns, and charging you exorbitant fees to support their own commission pockets. NO !!!
Hence, ANSWER on what to buy is clearly combined "INDEX FUNDS".
When to buy those stocks or funds?
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We all know the benefits of compunded interest, so the faster you start buying, the more money you get to compound.
ANSWER is "Right Now" !!
You dont need to have a big lump sum of money to start, you can also invest in a periodic manner, for example invest on a monthly basis. While doing that, you are also practising dollar cost averaging technique, which is a very powerful technique. Since prices often fluctuate, there are months where the prices are slightly lower and as a result you could buy more with the same monthly investment amount you have committed to. As a result, your total portfolio value will increase substantially due to more shares bought during lower prices.
The trick is not to freak out and do massively selling, when the stocks are going downtrends for that month. By buying the combined index fund, you are already lowering your risks, coupled with the power of dollar cost averaging, you can now ignore the fluctuation of the market totally.
When to sell those stocks or funds?
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After knowing what to buy, and when to buy, you also want to know when is a suitable time to sell those stocks or funds.
ANSWER: The later the better.
Based on the stock market history for the past 50 years, it can be observed that the longer the investment, the lower the risk. Based on past data, we observe the following:
Holding Duration / Risk of loss %
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5 years / 15%
10 years / 5%
15 years / <2%
25 years / nearly 0%
1) Understand what investing entails, and how to perform investing.
2) Know what to buy, when to buy, and most importantly when to sell
3) Index funds is the way to go for beginners due to simplicity, low risk, low cost, and consistent good performance
4) Start Investing early and practise Dollar cost averaging technique
5) Invest on a long term basis to lower risk and maximize returns
Hope you find this article useful, and start growing your very own money tree today. Feel free to share with your friends or bookmark for future references.
