How To Start Investing For The First Time?

Before we start talking about how to invest, we need to set some guideposts. You will not know where you are going unless you have a map. So let us build a map that you can use to invest. First, you need to know yourself. You should not invest in products that run counter to what you believe in or have a higher level of risk than you can tolerate. You need to know what you are investing in and be 100% comfortable with it. You or your financial adviser need to do an assessment of your objectives, your life stage, your risk tolerance, and your current financial situation.

Setting goals is an important step for every investor

When I hear investment companies ask clients, “How much do you need to retire?” I get confused. My answer is, “As much as humanly possible.” In my mind, they are asking the wrong question. You should never set a target until you take a good look at who you are and what your needs are. Once you do that, you are going to learn what kind of investments you should make, and how much risk you should take on. Only then can you begin to set goals. So let us look at you, and begin with your investment objectives.

Objectives may sound like the same thing as goals, but they are slightly different. Your objectives should be a general idea of what you want to get out of your investments. Do you want to generate income that you can use to live off? Do you want to grow your savings pot for later? Or, do you want to grow your money as quickly and as much as you can? Or, do you want to make sure you do not lose any money in your investments? These general objectives will guide your investment decisions.

Next, how much risk are you willing to take on?

If you do not want to lose any value in your investments, you probably have a low tolerance for risk. In order to be successful, every investor has to measure and manage risk. Most importantly, you need to assess potential reward. Often times, reward works in reverse with an investment’s risk profile. Shares, for example, are often described as ‘high-risk investments’ when compared with other types of investments. The primary risk of investing in shares is that it can result in loss of capital. Unexpected negative developments within a company can significantly affect share prices and the value of your portfolio. In saying that, this is not to scare you away from investing in shares, but it is simply a necessary understanding that all investors must have.

In addition, if you want fast growth, and you are comfortable with the prospect of losing money, you probably have a high tolerance for risk. Your objectives and risk tolerance can sometimes run counter to each other. If this is the case, you need to bring them together. If you want to speculate, but you have a low appetite for risk, you should adjust your objective to aim for moderate growth. If you prefer the high returns that come from taking a risk but you are scared to death of losing money, you need to move away from making high growth your objective. So, make sure your objectives and risk tolerance match.

Now, let us look at you from the outside

This life related self-assessments must be taken into consideration when you are setting your goals. To do this, you should ask yourself a few key questions. In fact, every registered financial adviser is mandated to do the same for every client. The first question is your experience level. This one is straightforward. If you have never invested before, you should start slowly and not take on too much risk. Next, look at your time horizon. This one is not as straightforward.

There is a lot of debate about how much risk you should take on, as you get older. Here is my position: take on as much risk as you can when you are young, because you have time to make up for mistakes. When you near retirement, evidence shows that keeping a higher level of risk pays off, because you have so much more to invest. Retirement does not mean you stop investing. So do not cut your risk too much, unless you just cannot tolerate the risk. Another question to consider is your financial situation. If you have debt and little savings, you should not take on too much risk. You literally cannot afford to lose money. If you have little or no debt and some savings, you can take on more risk.

Finally, your family situation should also influence how much risk you take on. If you have a family, you need to be more conservative to protect the savings you have, especially for things like healthcare, emergencies, and education. So now, let us look back at your objectives. Again, you need to change your objectives to match your self-assessment. If you are inexperienced, have some debt and have a family, you need to be very conservative with your investments to protect your savings. If you are young and do not have children, you have investment experience, have a little debt, and disposable income; you can take on a considerable amount of risk.

Save as much money as possible

So you may have noticed that we do not have a goal or a number, we just have a general idea of investment objectives and a risk profile. That is great. Now you can build a portfolio to match your objectives and risk profile. In the meanwhile, here is a goal for you. Save as much money as possible, based on your objectives and tolerance for risk. And this is only one part of a bigger picture. You should also think about budgeting and debt reduction, things that will help you save more. In the end, you will generate savings, and these will help buy you options in life, and your future will thank you for that.