Investing for Dummies – Investing Basics
Reviewing investing basics is important whether you are brand new to the investment world and want to learn to invest or have been investing for a while.
Sometimes you’ll hear a coach say, “We need to get back to the basics” because the fundamentals are the things that we just sometimes forget.
So here are nine simple investing basics for you to start investing:
Investing Basics #1 – Invest with a Purpose
Of course we invest to make money, but that is not the primary purpose.
A purpose behind investing may be to fund retirement, save for a big ticket purchase or college funding.
Knowing what kind of purpose or goal you have for your investments will help determine the type of investments that would be appropriate for you.
Investing Basics #2 – Determine Your Risk Tolerance
Don’t risk more than you can afford to lose. If you are a conservative person who likes to avoid risk in every day life, then it probably doesn’t make sense to get into very aggressive investments.
Take this risk tolerance quiz to get a better handle on your appetite for risk.
Investing Basics # 3 – Know Your Time Frame
Understanding your time frame will also help determine your risk tolerance.
For example if you are saving for a near term goal (5 years or less), you’ll want to avoid risky investments.
If your goal is 10 or more years away, then you might want to dial up the risk a little to try to get better returns.
Investing Basics #4 – Avoid Investments with Big Promises
If it’s too good to be true, then it probably is.
Making money with your investments doesn’t happen over night, so any investment that promises to do just that is probably one you should avoid.
Don’t get suckered into believing there is an easy way to make money. Making money usually requires some effort.
Investing Basics #5 – Diversify, Diversify, Diversify
“Don’t put all your eggs in one basket” is the old adage used when referring to diversification.
It simply means spreading your investments around using different asset classes and investment types.
Usually diversification will help to reduce risk and generate more consistent returns in your portfolio. If one investment performs poorly, you may have others that do well to help boost your returns.
Investing Basics #6 – Don’t Neglect or Obsess Over Your Account
If you have a long-term time horizon, there isn’t a need to check your investments multiple times per day making changes to the portfolio.
On the flip side, you should be at least opening your quarterly statements and reviewing your accounts on a semi-regular basis.
Set up a regular review cycle to help you evaluate and determine if any changes should be made.
If your situation, goal or time frames change then review your accounts and determine if any changes need to be made to your investment portfolio.
Investing Basics #7 – Rebalance Regularly
Rebalancing simply means getting your investments back to your original asset allocation percentages.
For example, if your portfolio is 65% stocks and 35% bonds and after a year your portfolio grows to 70% stocks, then rebalancing will have you sell off 5% and invest that back into the bonds to get you to your original 65/35 mix.
There is debate about how often you should rebalance in the investment community, but generally at the very least annually is a good idea.
Investing Basics #8 – Remind Yourself of Your Purpose Often
Don’t let your emotions get the best of you.
One of the biggest mistakes investors make with investing basics is they allow the short term ups and downs of their investments cloud their decisions and derail them from their purpose.
It’s very important to regularly remind yourself of the main goal or purpose you have for investing.
Investing with your emotions will almost guarantee you a lower return on investment because most of the time you will end up buying high and selling low – the very opposite of what you want to do.
Investing Basics #9 – Stay Informed
Having an understanding of these basic principles will help get you on the path towards reaching your goals.
Subscribing to Personal Finance blogs like this one and reading personal finance sites will help you stay informed and current on investing and personal finance issues and will help you stay on track.
There are many good Personal Finance blogs and websites to choose from that will help with your investing decisions.