Investing Basics You SHOULD Already Know

A recent survey found more than half of US adults invest, but only one in three claim to have advanced investing knowledge. If you’ve invested or are about to invest, here are 10 things to know!

10. Start With a Financial Plan

A popular saying is, “If you fail to plan, plan to fail.” Every investor needs to start with a financial plan. It should include goals and milestones. Have targets for specific amounts saved by specific dates. You might want to consider help from a financial advisor or planner, particularly a Certified Financial Planner.

9. Prioritize Saving Money

Unless you have a bundle of cash lying around, most investors must save to acquire money to invest. An easy way to save is through an automatic employer-based 401(k) plan. Some employers will match part or all of your contributions. You also should have a separate “emergency fund” savings apart from your investment savings.

8. Understand Compounding Interest

Wealth through investment most often comes through the power of compounding interest. Over time, as interest payments increase the amount of principal you have invested, how much you earn from interest will also exponentially increase. For example, $10,000 invested at 20% annually for 25 years would grow to nearly $1 million.

7. Understand Investing Risks

Investing brings rewards but also carries risks. Make sure you understand the trade-off you are making between risk and return (reward). You should determine your risk tolerance. How much are you prepared to or can afford to lose? Diversify your investments. Remember the saying: “Don’t put all your eggs in one basket.”

6. Understand Asset Allocation and Diversification

Asset allocation and diversification are closely related concepts. Diversification is spreading your investments across a variety of investment types. That way, if one fails, you haven’t lost everything. Asset allocation determines what categories you invest in, such as bonds, CDs, stocks, precious metals, cryptocurrency, REITs, and more, as well as the amount of uninvested cash you hold.

5. Keep Your Costs Low

Although returns on future investments are beyond an investor’s control, one thing investors must take into consideration is the costs associated with their investments. These are transaction costs, account fees, investment management fees, and more. For example, a slightly lower-yielding investment with low fees may net more than a slightly higher-yielding with higher fees.

4. Understand Traditional Investment Strategies

Traditional investment strategies fall into three types. Beginning investors should understand each one of these and determine if any or all of them are right for them. Decide how much you want to invest in each strategy. The three are:

Active versus passive investing.
Value versus growth investing.
Income-oriented versus gains-oriented investing.

3. Practice Discipline

Investing is something that pays off over the long term. Don’t allow market fluctuations to rattle you or make you panic and jump from one investment to another. Start with a well-thought-out and well-constructed financial plan and stick with it. Stay disciplined with your savings as well.

2. Have an Owner or Lender’s Mindset

When buying a stock, ask yourself if you’d want to be part owner of that business. After all, stocks are shares of ownership. Similarly, when buying bonds, ask if you would feel comfortable being a creditor of that issuer. Bonds are loans extended by the investor. This mindset will allow you to scrutinize more thoroughly and make more intelligent decisions.

1. Don’t Invest in What You Don’t Understand

Be wary of investing in anything you don’t thoroughly understand. Many companies today have complex and novel business models. For example, if you can’t understand how a company will be more than a fad and be around for the long haul, its stock may not be a wise investment. Don’t rely on others’ opinions. Only invest in what you understand.