Working is awesome, you’re earning your own paycheck and you can pretty much do whatever you want with your money*. If you’ve managed to build up a nice amount of savings for yourself (congrats!), it might be time to consider investing.
*(though we highly recommend that you create a budget and stick to it)
What is investing? And why should you do it?
Simply put, investing is about taking a little bit of risk with your money, to get better returns. Returns can be in the form of profit (buy something cheap, sell it later at a higher price) or through a stream of income. The goal is for your total return to be more than the amount of money you put in at the beginning.
Examples of things you can invest in include; property, shares in companies, mutual funds, exchange traded funds, or cryptocurrencies.
You should look into investing if you have money on the side that’s not really doing anything. You can of course choose to leave that money in a deposit account, but you could be missing out on the opportunity to make better returns.
But, as with anything, before taking the plunge, there are a few things that you should consider first.
Don’t use money that you’re going to need anytime soon
There’s no two ways about it, investing is risky, and you can come out with less money than you put in. When investing, don’t use money that you’re saving up for emergencies. Be sure that the money you’re using is money you’re willing to risk some losses on. Never use money that you’re saving up for short-term purpose. If things go sour, explaining to the missus that you lost the holiday money shorting bitcoins could be challenging.
So, as a rule, NEVER INVEST WITH MONEY THAT’S MEANT FOR OTHER THINGS THAT YOU CAN’T AFFORD TO LOSE.
Think about how much time you’re going to spend thinking about your investments
Unless you’re an investment analyst, or a fund manager, it’s unlikely that you’ll be able to continuously watch your investments. Most likely, you’d be busy doing your own job.
How much time you’d be able to spend monitoring your investments will affect your investment strategy. If you have lots of time, you could spend more of it poring over each investment decision (e.g. making individual stock picks into your portfolio). But if you have other things you need to focus on, it might make sense to have someone else do it for you (e.g. mutual funds or ETFs).
In any case, think about how much time you can invest in your investments and decide which options suit you best. If you’ve got some time, try a more active way of investing, if not, find funds that are professionally managed.
How much risk are you willing to take?
Just to drill it in, it’s best to point out again that investing is risky business. So you’re going to have to figure out how much volatility you can stomach. Do you find jumping out of a plane without parachute exciting? Or are you someone who’d feel right at home in a bubble wrap? Or maybe you’d consider yourself to be somewhere in between?
Investing can be quite a stressful game; different investment classes have different behaviours. Investments like commodities, currencies and equities can fluctuate wildly, leaving some investors feeling a little nauseous. Other investment assets like bonds, or treasuries are a lot calmer, and less likely to induce palpitations.
So, when figuring out what to invest in, think about how you would react when things get a little rough. Try to find your own balance, and have a portfolio that’s a mix between higher risk assets that can yield higher returns and lower risk assets that add a bit of stability. This will help you sleep better at night.
What is your investment horizon?
All good things take time. With investments, it’s hard to make any gains the short term. Some assets can create returns almost instantly, though they might need you to pay them a lot more attention. Most times, these investments need you to leverage and can come with a lot more risk than you can tolerate. Other investments can get you a similar kind of return but will take a longer time, weeks, months, even years. Most times it’s best to stretch out your investment horizon over a few years. This way you won’t have to stress yourself by needlessly checking your investment’s performance every few hours, only to get frustrated to find out that it’s not really going anywhere.
Being able to invest whilst you’re young is useful. With time as your friend, and the magic of compounding, your returns have the potential to grow exponentially.
Remember, when investing, keep your horizon a bit longer, and don’t fret over it too often. Just be sure to review your investment’s performance every couple of months to make sure that everything is still on track. Also take note of any major events that will require you to visit your investment strategy.
And there you have it! Investing is really just about making your extra money go the extra mile. As with anything, before deciding to dive in, be sure to consider how long you want to keep that money invested, how much risk you’re willing to take, and how much time you’re willing to spend studying your potential investment assets.
Oh and, make sure that the money you’re investing isn’t coming out of your rainy-day funds, because if emergency strikes you might find yourself in a bit of a pickle.
Can you think of anything else you might want to consider before deciding to invest? Let us know!