Why you must learn how to invest money.
Most of the question you hear from beginners is, “how do I invest my money?” Some people will put it in a different way by sayinght for me?” Well, these questions are the same. While there is nothing bad in seeking for advice on how to invest money, this type of questions tells me more about the individuals concerned. It reveals the level of investment literacy of such person. A wise person once said, “if you don’t know where you are going, all roads will look like the right way”. At times, he will say it in another form by saying, “if you don’t know where you are going, other people will show you the way to go”. The Great Book has its own contribution in this saying. It says, “some people want to get to the city but they don’t know the way to it. All of these sayings are trying to point out the frustration that comes with ignorance. We all know that ignorance is a disease. You are victim of what you don’t know.
So, let’s come back to the subject at hand which is “how to invest money for beginners”. I know that some people will expect me to talk on how to invest in stocks, how to invest in gold or how to invest in real estate. I am going to address this topic in a different way. I like to say that the first thing you need to do is not to rush into investment of any kind to rush into investment of any kind so that you don’t get your fingers burnt. The best way to start investing is to invest in education.
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Invest in Yourself: Education has proved to be the best investment that will always yield the best returns. So, the question you may like to ask is, what type of education? When I talk about investing in education, I am not talking about the traditional education which is all about going to school and get a high grade. Of course, there is nothing bad in this but you will agree with me that there are many graduates with high grade who are roaming about streets jobless and broke. Before you go into investing, you need to first invest in educating yourself about investment at large. You should acknowledge that there are several investment vehicles. For instance, you may be interested in investing in mutual funds, stocks, bonds, gold, real estate or business. All these investments have their peculiarity. So, if you what to invest in stocks, it makes sense to understand the basics of investing in shares at least. You will like to educate yourself about some vital terms such as share price, dividend yield, price yield, earning per share (EPS), Price Earnings Ratio (P/E), Price to Book Value, Bullish and Bearish markets etc. Of course, there is nothing bad in asking for professional advice or paying an expert to make an investment decision for you. However, you should understand that the fact that someone is an expert does not mean that he will always make the decision that best suits your interest. So, the salient question is not what to invest in, it is having the right education that will help you make the right investment decision that will not only secure your capital but will also enhance your returns.
Why you should learn how to invest?
Investment in education yields the best returns: The returns on your investment may not be as quantifiable the same way you can measure your returns on investment in stocks. But the truth is that, whatever level of returns you enjoy in any investment is a direct consequence or result of the level of the knowledge you have about the investment. The unfortunate thing is that, most of the investment beginners usually jump this process. They rush into investment simply because someone told them that the investment is good. Before you know it, they lose their hard earned money. This situation is even worse when one can easily use his credit card to make stock purchase online.
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If you have the right knowledge about an investment, you become more confident with your investing decision. I remember the first time I bought stocks. The truth is that I bought the stocks just because I wanted to make money without knowing how stock market operates. Shortly immediately I bought the stocks, its price started going down. I became very nervous. The next thing I did was to sell off the stocks at loss. By the time I sold off the stocks, the price jumped again. It continued gaining points every day in a ten day roll. Thinking that the trend will continue that way, I bought into the same stocks again. As if the market was waiting for me to buy the stock, thereafter, the price continued to nose dive again. To cut the story short, I lost more than twenty five per cent of my capital within twenty days. I then remembered a saying that; “if education is too expensive, then try ignorance”. Ignorance costs! So, if you are not willing to learn how to invest money, I will say that investing is not a good option for you.
Pay off your debts: I want to believe that the reason why you want to invest is to increase your net worth. It is only the rookies that focus only on profits. You need to see far more than this. You may invest in stocks and make gains from it and still, the profits may not impact on your net worth. How? Well, I may need to explain what net worth means. Your net worth is simply the difference between your assets and liabilities. For instance, if your assets worth $90,000 and your liabilities amount to $60,000, your net worth is just $30,000. So, if you have huge debts that you owe, this may have negative effects on your net worth. Therefore, the best place to start your investment journey is to ensure that you pay down your debts especially if the interest rates on such debts are quite high. If you have debts with different interest rates, it is better to pay off the debts with highest interest rates first. If you invest your money in a security that yield 5% returns while you are paying around 7% interest rate on loan, you will realise that instead of your net worth to be increasing, the interest you are paying on your loan will either reduce or lower the growth rate of your net worth. This is not how to invest money at all. It makes economic sense to first of all pay off the debt. Thereafter, you can concentrate on investing your fund in profitable securities. However, there is an exception here. If the interest rates on your loans are very low and you know that you can achieve higher rate of returns on your investment, you may choose to be making minimum payment on such loans. You can then invest the available funds.
Build your Emergency: You need to set sum money aside to take care of some exigencies. There will be some times that you will need to make some payments apart from your routine expenses. In most cases, this kind of expenses may come up when you least prepare for it. Examples of such expenses are medical bills, dental expenses, emergency pet care, funeral costs, unanticipated trips and impromptu repairs that you need to carry out on your car or other assets that you own. It can even be that you suddenly lost your job, meaning that you temporarily don’t have income coming to you at the end of the month. In such time, you will fall back on your emergency fund. That is why it is suggested that the amount in your emergency fund should be able to cover at least six month expenses. Otherwise, you may be forced to terminate your investment abruptly. This may result to loss of money. If you don’t want to lose money while investing, it is always better to think medium or long term. Another angle to the reason why you should ensure that you have sufficient amount in your emergency fund is that, it gives you peace of mind. When you know that you can easily take care of unforeseen expenses, you are relaxed. In that state, you will be able to think creatively. When you invest your money, you will not be too anxious about what the outcome of the investment may be. In fact, one of the reasons people lost money especially when investing in stocks is fear. At a slight drop of stock price, some people offload their stocks in fear that the market will crash. Don’t let me talk much on this now as I will still explain this later. If you are finding it difficult to build your emergency fund, you can set up direct deposit. This will ensure that a portion of your paycheck is paid directly into the emergency fund immediately the money hit your checking account. A Make it a principle to pay yourself first. If you can develop this attitude, it will also help you when you start to invest your money. Another way to grow your emergency fund is to channel any windfalls you receive such as bonus, gifts and tax rebates into the account. On the other hand, you may find a way of increasing your income.
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Define your goals: You need to define the reasons why you want to invest. People invest for different reasons. Some of the reasons why people invest include the need to plan for retirement; need for passive income; need to save for children school fee or to buy a house. It may even be that you plan to invest in order to raise a start-up capital for a new business. Your investment goals will determine the kind of investment you would make. You don’t invest in stocks because other people are investing in the stocks. That is not how to invest money. You invest based on the goals that you want to achieve. For instance, a retiree who is no longer working may like to invest in dividend stocks in order to generate passive income. At least, this can generate passive income for him. On the contrary, a young man who is working may not need passive income. Instead, his target may be to invest in growth stocks for capital appreciation. You need to define your investment goals. You should divide your investment goals into short term, medium and long term goals. Investing without a goal is like playing a football without a goal post. When you define your investment goals, it will not only give you a sense of direction. You will be able to measure your performance.
Don’t borrow money to invest: As a beginner, I will not encourage you to borrow money to invest. You should remember that the interest on loan starts to accrue immediately you collect the money. It does not matter how you choose to use the money or whether you are able to earn income from the money or not. Some people actually borrow money to invest. Some people actually borrow money to invest but they would possibly be experienced in investing. They are skilled and they may possibly have a balanced portfolio. So, if one security is not performing, other securities may perform very well. The reason you should not borrow is simple. If you invest borrowed money and the investment result to a loss, you may suddenly find yourself in debt as you may not have the money to repay your loan and the interest when due.
Don’t invest the money you can’t afford to lose: This point is very close to the one raised above but they are not the same. It is possible that you can some funds you can invest without the need to borrow. But if your life depends on the money to the extent that if you lose the money, you will experience financial difficulty if you lose the money, you are encouraged not to invest the money. For example, if you will no longer be able to pay your children’s school fee or that you will not be able to pay for your routine expenses, it will be better to postpone the investment until you have idle funds you can invest. You need to have a rethink on any investment that can lower your standard of living if it turns otherwise.
Start small: This article on how to invest money will not complete without letting you know about the need to start small. No matter how promising an investment may look, you will do yourself good by start your investment journey by taking a baby step. Taking a baby step is the best way to go. Even if you have all the money to invest, you need to bear in mind that each investment has element of risks. As a beginner, you should give yourself some time to understand the investment terrain. For example, if you start investing with just $1,000 and it happens that you lost 20%, that will be just $200 loss. You can easily absorb that amount. But if you invest $100,000 and lost 20%; the loss will be a whopping $20,000. That amount is very significant. It can cause set back to reaching your financial goal. There is beauty in starting small. You should not despise the days of little beginning. It is drops of water that makes ocean. On the other hand, if you start big, drops of water can empty a whole big tank full of water. Allow the odd to work to your favour.
Don’t invest in “get rich quick” scheme: There are many “get rich quick” investments going on both online and offline. Some of these schemes are actually scams. The promoters usually do everything to convince people that they are genuine. They promise mouth-watering returns that are irresistible. Initially, they ensure that they keep to their promises. This makes people to believe them. Before you know it, you see people rushing in to be part of the so called investment. Unknown to the unsuspecting investors, the promoters are only using Peter’s funds to Paul. That is, they use the money of the new recruits to pay the existing members. The problem is that, this system is not sustainable. It will get to the level when the number of the existing members is far more than the new recruits. Less new recruits mean less money coming into the scheme. Therefore, at a point, the promoters will not have money to pay their members any longer. I don’t want to start mentioning names of schemes here but they abound around us. You need to be careful about the type of investment you are putting your money into. My guiding principle has been, if the offer looks too good, I should better be careful. Many people have fallen prey of different schemes in the past. Unfortunately, people are still making the same mistakes. They seem not to learn from others of from their past mistakes. That is why they keep losing money at the end. If you look at it critically, you will come to conclusion that it is greed that makes people get involved in some of these schemes. Despite the fact that some of the schemes usually put a disclaimer that you may lose all your money and they will not be responsible for the loss, people will still go ahead. If you don’t want sleepless nights that may arise as a result of the loss of your money, it is better to stay with schemes that are questionable.
Don’t invest in what you don’t understand: There are many legitimate investment vehicles ranging from stocks, mutual funds, bonds, forex to real estate etc. While they are all okay, it is unlikely that you will understand how all these investments work. Therefore, it is safer to stick to the ones you understand very well. There was a time I ventured into forex trading. In fact, each time I invested in it, I lost all my money. If I had invested the money in stocks which I understand, I wouldn’t have lost the money. Instead, I would have made some gains no matter how little it might be. That does not mean you should not try investing in new securities apart from the ones you are used to. Before you do that, you must ensure you learn the rule of the game. It doesn’t matter how long you have been an investor. Any time you are making a new investment, you should see yourself as a beginner. That is, you need to follow the tips I am sharing in this article afresh. For example, you start small and you should invest the money you can afford to lose.
Master your emotion: You you are planning to invest money is stocks, you should learn how to master your emotion. In most cases, people lose money due to greed and fear. When stock prices are rising, greed will not make some people to sell even though they have made appreciable returns. No matter how bullish the stock market is, it will get to a point that the prices will get to a plateau and then take a correction. Then, the prices will start trending downward. If you invest in stocks and don’t sell at the right time, you may lose all the gains you would have made back to the market. The second emotion is fear. If you ask any experienced investor how to invest money in stocks, he will tell you that you should learn how to live above fear. Stock prices will always fluctuate. So, if you invest today and the stock price falls below your buying price the following week, that may not mean you will lose money. You need to exercise some patience. The price will still go up. However, it is important that you ensure that you invest in stocks with good fundamentals. If the fundamentals are right, you should not be perturbed about temporary drop in stock prices.
Choose a broker: You will need a professional who can provide you a practical guide on how investing works. Some people operate a “do-it-yourself” approach. This means they may not necessarily need a stock broker before they trade stocks. Nevertheless, they still need to open an account that will give them a platform where they can buy and sell stocks, bonds or other instruments of their interest. But as a beginner who is just learning how to invest money, it is advisable that you choose a stock broker you can trust. He will be able to guide you on the types of investments that will help you meet your investment goals.
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All the points discussed here apply to beginners who are just trying to learn how to invest money. As you continue to grow and gather more experience, you may be able to break some of these rules.