Many people that want to start investing likely have other areas that they should address first. Check out my recent blog, 5 money tips outside of investing for a refresher on what to consider before investing. For those of you that have paid off your high interest debt, established an emergency fund, and may still have some #stimmymoney sitting around in your savings, you may be wondering where to start as an investor.
Start with your goals - Take some time and write down a few things that you would like to achieve with your money over the short, intermediate and long term. Don’t be afraid to make these oddly specific. In fact, avoid vague goals like “financial independence” that make your life seem like a walk down the beach of a Cialis® commercial. Let’s get back to what you want your money to do for you. Maybe it’s saving for a week’s vacation in Costa Rica in 2 years or saving for your first home down payment in 5 years. We can even go long term and think about investing for retirement in 30 years. Your goals will be flexible and will change over time. You may not make the down payment on your first home in exactly 5 years, but what matters most is establishing the goal now to take those small actions over time. In the long run, this will put you on track for success.
Invest according to time horizon - Why did we start with your goals? Once they are set, you’ll have a better idea of how to structure your investments to achieve these goals. If you’re saving for that Costa Rica trip in 2 years, which is considered a short-term goal, you’ll want to take a more conservative strategy than with your investments in a retirement account that won’t be touched for 30 years. Why? Financial markets are volatile in the short term. When you need to buy your plane ticket for your Costa Rican trip, you need to know that your money is going to be there. Markets fluctuate, and you don’t want to be caught selling at a loss to book your flight at the wrong time.
Take it from me - My first experience with investing was in the fall of my junior year of college. I had some spare cash from working over the summer and decided to invest a few thousand dollars in Under Armour stock. I’d done some investment research on the company and was excited to dip my toes into the stock market. What I didn’t consider at the time was that I’d be studying abroad in Barcelona, Spain the following semester. With this as the case, I would soon need every dollar I had to be able to experience the culture and travel of a study abroad experience.
Fast forward 6 months later: I was sitting in my apartment in Barcelona, surviving off of a diet of almost entirely white rice and tomate frito and realizing I had to sell the stock to raise cash. The stock had dipped by over 30% since my initial buy purchases but my hands were tied. Had the money been in cash, or a low-risk investment, the money would have been there to meet my short-term needs.
Diversify to reduce risk - Diversifying your investments is about not putting all of your eggs in one basket. By spreading your holdings over different asset classes (stocks and bonds), geographies, industries and company sizes, you’ll help to reduce the risk associated with individual companies. This will help to provide your portfolio with more support in the long run.
Keep a long-term perspective - Patience is important when considering your long-term goals like saving for retirement. Given a long-term timeframe, you can make time work for you. The benefits of saving regularly, even a small amount, can add up significantly over time. Focus more on the end goal than the day-to-day fluctuations of the market.
Do you have questions on how to get started with investing? Feel free to reach out. I’d be happy to help.
All the best,
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.