Last updated on May 27th, 2021 at 05:05 pm
Gone are the days you could put any extra income into a savings account, and wait for it to earn whatever modest interest your bank decided to give you. Today, there are numerous avenues for investment where you can receive much higher returns. However, with the financial crisis of 2008 still fresh in most people’s memory, you’re well within your rights to be a bit hesitant about going into the stock market.
You might also be wondering if you have enough extra income to build a worthwhile investment portfolio, since many of us have student loans and mortgages to repay. And how do you know which, from the world of investment options available, will yield the best returns?
What is an Investment Portfolio?
Your investment portfolio is the totality of assets you have in the form of various investment instruments. It will include the different stocks, bonds, and mutual funds you’ve bought through your bank or investment company. If you have a 401(k), you should also consider this part of your portfolio.
Set Yourself Up to Save
Saving will empower you to invest, so the earlier you begin, the better. You can start small, with as little as $20 per month. But if you’re consistent, you will see your savings grow.
The key is to set investment goals and build your savings toward those goals. If this means changing your lifestyle and pinching pennies, brace yourself to do that with the bigger picture in mind. Draw up a lean budget and stick to it, rain or shine.
To avoid the temptation to spend, think about creating an automatic payment to your savings account that deposits the amount you wish to save monthly as soon as your paycheck arrives.
To free up funds for investment, pay off any debts you have as soon as you can.
Establish Your Risk Tolerance
What you earn from your investment will ultimately depend on how much you’re willing to commit to the various investments in your portfolio. Risk tolerance, or risk appetite, is the extent to which you’re willing to lose on the investments you make. The younger you are, the higher your risk tolerance should be as you have many years of income generation ahead of you.
Remember that apart from government bonds, no other investment promises a guaranteed rate of return. Stocks rise and fall by the minute depending on how well their parent companies are doing, announcements they make about their future, and other factors. This is why when you’re investing in the stock market, it’s wise to think long-term.
Your risk tolerance should determine your investment portfolio. If your tolerance is high, stocks are a good idea as they have the potential for higher rewards. Bonds issued by the government or private companies are a safer investment, but their potential for returns is lower.
There are calculators freely available online to help you quantify your risk tolerance.
Diversify and Rebalance as Needed
It’s never wise to have all your eggs in one basket. This is especially true with investing. Spread your risk across several counters in different industries. The drop in value of one counter can be made up for by the rise in another.
When a stock rises or falls in value, it distorts the balance in your portfolio. You will need to make adjustments to restore the balance if you’re to stay on track with achieving your investment goals. If you have a robo-advisor or a real-life financial consultant to assist you, this can be done as you go about your other activities.
If you would prefer to leave the financial decision-making to the experts, you can have a financial advisor help build your portfolio. While they will charge a fee for their services, you will have all their investment know-how at your disposal to ensure you get maximum returns.
If paying for the expertise of portfolio managers threatens to eat up too much of the funds you wish to invest, opt for a robo-advisor. These automated advisors rely on artificial intelligence and a vast knowledge base of investment banking to structure and manage your portfolio. The beauty of these automated advisors is that you can get started with them immediately, no matter how small your initial investment.
Even if you have a portfolio manager, it’s still wise for you to keep track of your investments. Keep up-to-date with the latest developments in the companies you’re invested in by paying attention to conventional and social media.
How to Invest
If your bank doubles as an investment bank, as many banks tend to do nowadays, you can buy your stocks or bonds directly from there. Or you could go to an investment firm, and open an account with them. Such firms can even assign you an account manager to help you get the most out of your investments.
There is also the option of buying stocks directly yourself, and there are apps to help you do so conveniently. Some will offer tips on how to invest periodically.
Start with the End in Mind
A big part of your success as an investor will depend on the goals you set for yourself from the outset. You then need to find the combination of investments that will help you get there the quickest. Staying faithful to your goals calls for sacrifice and discipline, so be prepared to do what it takes.
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