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Investment tips for beginners

By Pauline Muindi | August 23rd 2020 at 00:00:00 GMT +0300

Investing is one of the main pillars of building personal wealth. Money earned from investments ensures long-term financial security. While you can make money and save it, investing is the only way to make your money work for you.

Money saved in a bank account only earns you a small interest. When you factor in inflation, the interest you earn from a savings account isn’t all that attractive.

Your bank is certainly not breaking a sweat to pay you for the honour of storing your money. Banks use depositors’ money to give out loans. The interest earned from loans is the main source of profit for banks.

When you think about it this way, you realise that the money in your savings account works harder for the bank than the depositor.

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As American business guru Robert G Allen says “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”

To build wealth, you need your money to work for its master – you! Not investing properly as early as possible can mean a longer working life and less long-term financial security.

Simply put, investing helps you hit your financial goals sooner and live the financially secure life of your dreams. Whether your dream is to take your children to the most elite schools, buy a house in a posh suburb or travel the world when you retire, investing plays a key role in reaching your financial goals.

However, starting your investment journey might turn out to be more difficult than you had anticipated. Every beginner investor faces questions such as: When should I start? What should I invest in? What if I lose my money? Whom should I listen to for investing advice?

The truth is that the best time to start saving and investing was when you made your first shilling. The next best time to save and invest is today. The earlier you start, the more time you will have to learn the ropes and work on your financial goals. Yes, you might lose your money in bad investments, but if you invest wisely, the potential to earn money outweighs the risk.

Here are some simple, straightforward tips to get a beginner investor started on the right path:

The time is now

Most beginners feel intimidated and clueless about when and where to start investing. You might feel that you don’t have enough money or knowledge to start your investment journey.

You might think “I’ll wait till I have a better job” or “I’ll start investing next year”. But the truth is that there will never be a perfect time to start investing. Start now, with what you have, and keep adding to it.

As a beginner investor, don’t place the expectations on your investments too high. It is best to accept that your investments might lose money, and that doesn’t mean you’ve done anything wrong. It’s normal for long-term investments to lose money in some years and gain in others.

Beginner investors are easily misled by poor portfolio performance, which makes them doubt their investment decisions and consequently pull out their money too early.

Panic selling is a sure way to lose money. Instead of focusing on your portfolio’s short-term performance, focus on your long-term goals and how to achieve them.

Understand your risk tolerance

Being an investor doesn’t mean being a daredevil. You have to be level-headed when making investment decisions. Weigh the risks of each investment carefully. Take only as much risk as your goals require and your stomach can bear. Just because you can afford to take an investment risk doesn’t mean that you should. Risk tolerance refers to an investor’s ability to endure the potential of losing money on an investment.

An individual’s risk tolerance can change throughout their life depending on factors such as their financial standing or life circumstances. For example, a young childless person saving up for retirement might have higher risk tolerance than an older individual with more family responsibilities.

The younger person might be more willing to purchase riskier assets because they will have more time to recoup any losses. An older person who’s close to retirement might want to go for less risky investments such as high-yield savings accounts, certificates of deposit, savings bonds, money market funds, dividend-paying stocks, and treasury bills.

The best advice for all investors is to approach your investments the same way you would driving a car. To enjoy a smooth drive, it is best to maintain the same speed or adjust it gradually.

Start with mutual funds

What should you invest in at the beginning? Choosing the right investment from so many available options can easily result into analysis paralysis for beginner investors. This is where you are stuck in over-analysing and overthinking a decision, so much that you don’t make any decision at all.

Luckily broad-based mutual funds and exchange-traded funds are a great place to start. These funds pool money from different investors to buy a variety of securities.  Mutual funds assure you of diversification to achieve maximum returns on your investment.

The advantages of investing in mutual funds include being able to quickly convert your investment into cash. Monthly contributions help the investment grow over time. You also get professional investment management, which makes it great for beginner investors. There are different kinds of mutual funds – do your research before investing to find one that is suitable for your goals and risk tolerance levels.

Diversify your investments

Depending on your age and risk tolerance levels, select different types of investments to put your money into. This means you should allocate some funds to stocks, bonds, real estate, bank products, annuities, emerging markets and so on.

The goal of diversification is to increase your odds of investment success. Markets can be volatile and unpredictable, so diversifying your investments helps you weather the storms. Different investments react differently to the same market or economic event.

For example, stocks outperform bonds when the economy is growing. On the other hand, bonds perform better thank stocks when the economy slows down. By investing in both, you reduce the risk of your portfolio taking a huge hit when the market swings one way or the other.

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