Investing Money Can Be Simple
Financial experts make investing money seem so complicated when it’s not complicate at all. Investing only becomes complicated when you do not understand how the market works. Once you understand the market, you can use it to achieve your personal financial goals. But if fear stops you from investing you are missing some great opportunities to grow your money. Overcoming any fears about losing your money due to wrong investment choices can be made by learning the basics.
#1 – Understand Your Own Risk Tolerance
Your tolerance for risk is very important when you are investing. In other words, how much risk can you handle before going crazy? If you are always worrying about your investments to the point where you check on them several times a day, maybe your risk tolerance is lower than you think. And that’s okay, there is not a right or wrong risk tolerance level. It’s a personal thing.
Your tolerance for risk is based on how comfortable you are watching your investments ride the market wave. How well do you react when the market goes up and down? Do you lose sleep when you watch your investments drop in value due to market conditions? Your risk tolerance level should be your investment blueprint. If you have a hard time with the stock market’s roller coaster effect, then maybe you can look at bonds or certificates of deposit, which are more stable. Your knowledge of your personal tolerance for market risk and conditions can be a great guideline when making investment choices.
There are investments for every type of investor. Bonds and money market accounts would be low risk. You can find mid-risk or high-risk stocks. Whatever you do just be sure to invest according to your own risk tolerance and not compete with your co-worker or neighbor’s level of risk. One’s risk tolerance depends upon age and the amount of time the investments have to grow until they will be withdrawn. Younger investors can invest in a bit more risky investments because they have time on their side. Young investors have many years for their investments to rebound from losses so they aren’t as nervous as investors who are planning to retire in a few years.
#2 – Understand Risk In General
There are different types of risk but the 2 that most investors are concerned about are losses and returns. Investors are anxious about losing value in their accounts due to low rates of return. And that is understandable. After all, everyone wants their accounts to grow in value; no one wants to lose money. Regardless of the type of risk, they all impact the growth or decline of your investments.
Company risk is the risk that the internal struggles or problems that a company experiences will affect the price of their stock, thus your portfolio value. Market risk is the risk of the entire market dropping in value, thus your account dropping in value also. Inflation risk is the risk that your investment returns will be less than the rate of inflation. Diversification risk, the risk that your investments are too heavily concentrated in a one market segment and that segment drops in value. For example, all of your investment money is in energy stocks. A better approach would be to spread your investment money around to include financials, healthcare, consumer goods and international. This way if one segments drops, the value of your entire portfolio does not drop.
Once you understand that different types of risk exist you can adjust or avoid, when possible, those risks that you are uncomfortable with.
#3 – Understand Diversification
Diversification sounds so complex, but it’s simple. All it means is to spread your investment dollars among different assets classes; namely stocks, bonds and cash equivalents (for example money market). When your portfolio is diversified, the market swings should have less of an impact on your overall investment returns. Since each of the asset classes is impacted differently by market swings, your market risk is reduced. When stocks are up, bonds are usually down and vice versa; so by investing in both, you offset the risks of the market. Investing Money Made Simple
In our attempts to simplify investing we only touch on the basics. This way you can tip toe into the market instead of jumping in, getting burned and jumping out again. Investing can involve risk, yes, but investing can also generate financial growth. But remember, your money will not double or triple in value overnight. Investment growth takes time, it’s a process. The only way you can start that process is to start investing. If you are nervous about investing, start out slowly, learn the level of risk you can work with and go from there.