Investing is the cornerstone of financial independence. With low bank interest rates, you’ll never get rich by saving alone – and the returns offered by stocks and other investment classes go far and above anything you might receive as an incentive from a high street organisation.
With that being said, it’s easy to get sucked into the popularist investing advice that seems to be all over social media these days. Even though the people posting online may know what they’re doing (in many cases, they don’t), what’s right for one investor is rarely right for another. It’s what has led to the likes of the US Securities and Exchange Commission (SEC) and the UK Financial Conduct Authority (FCA) issuing warnings about rapid investment decisions and a lack of proper financial planning.
With these thoughts in mind, here are some of the key things you need to consider before deciding where to invest your hard-earned cash.
- Planning is crucial
Before you can start channelling your money into an investment account, you absolutely must conduct a complete audit of your personal finances. This means making a budget, but beyond that you should be able to state what it is that you want to achieve.
This will guide your investment strategy, and help you to understand the different options available to you. Certain investments are more suitable for short term gains, for instance, whereas most people will find that a longer-term strategy suits their needs far better whilst providing them with a level of comfort on risk (more on that later).
Either way, you shouldn’t start putting money into investments without first knowing that you have enough income to cover all your basic outgoings. Don’t overstretch yourself, and always think about how the future might pan out.
- Understand your own risk tolerance
Different types of investment have different levels of risk associated with them. A high yield savings account, for instance, is generally deemed to be very low risk – but with that comparative level of safety comes a lower rate of return.
By contrast, stocks are considered to be much higher risk since the companies involved could fail, whilst mutual funds fall somewhere in the middle since they spread the risk between a number of different companies and sectors.
All in all, there’s much more to risk than just deciding how much of a return you want to make. It’s important never to stake more than you could afford to lose, and it’s helpful to always read the underlying fundamental documents to get a feel for risk levels before parting with your money.
- Don’t underestimate diversification
If you’ve ever heard the phrase ‘don’t put all your eggs in one basket’, you’re halfway to understanding diversification. This is the practice of spreading your investments between different classes of assets, and even between different subdivisions.
It’s easy to see why putting all of your money into travel company stocks could easily see you end up with huge losses during a pandemic that grounds flights, whilst somebody who mixed up their holdings with some medical company shares would probably be faring much better. Of course, that’s a simplified topical example, but the concept remains the same no matter what your goals are.
Never invest in too narrow a group of assets, and always try to pick out a variety of investments that react differently to market events.
- Always keep an emergency fund
Savvy investors build and continue adding to an emergency fund, even though their cash could earn better returns if it was invested.
The important thing to remember is that investments take time to liquidate, and in an emergency you may need to lay your hands-on cash at very short notice. For that reason, many experts suggest keeping between three to six months’ worth of your essential costs stored up for a rainy day.
If you do find yourself lacking cash in an emergency situation, it’s also always possible to seek out quick loans from the many direct lenders online. They provide easy access to money, and by using a reputable online loan broker, you may even be able to avoid having to make multiple applications.
- Don’t be tempted by ‘hot tips’
Perhaps the most topical advice any financial planner could give right now is to avoid ‘hot tips’ on where to invest your money. With people spending more time at home and enjoying an expendable income that can’t be used up in the closed restaurants and entertainment venues, many people have turned to investing and trying to pick out the next Tesla or Apple to make their millions on.
Sadly, trying to choose stocks in this way almost always ends badly. Sure, some people might get it right, but following the crowd is never a good idea and you should always do your own research in line with your individual goals.
Just remember that the online trader dishing out tips is unlikely to help you pay your rent if it all goes wrong.
The bottom line
All in all, investing your money wisely can help you to become financially independent and to live the life you’ve always dreamed of. It is, however, a common misconception that this is an easy or short journey, and only by investing over the long run and in a methodical way can you hope to make consistent returns.
Above all, remember that no matter how enthusiastic online investors are, your money is precious, and you should be careful to use it wisely for your own benefit.