Building Long-Term Wealth: 7 Steps To Making Wise Investments As A New Investor
Oct 09 2021
6 min read
6 min read
This post explores the key steps to follow when choosing an investment as a new investor to ensure long-term growth.
Table of Contents
- What is investing?
- How to start investing
- 7 Steps To Making Wise Investments As A New Investor - A.K.A Picking Winning Assets
- Step #01 - Learn about the financial markets.
- Step #02- Establish your financial goals and risk tolerance.
- Step #03- Choose the right type of financial instruments or assets.
- Step #04- Know your circle of competence.
- Step #05- Look for investment advice.
- Step #06- Do your own research and due diligence.
- Step #07- Create a plan and stick to it.
- The Bottom Line
,marketing-relatedmonths'You've heard the old adage, "The best time to plant a tree was 20 years ago. The second-best time is now." This proverb rings true for investing too. As a new investor, it's never too early to start building your wealth by investing in assets that are safe and practical. This is the basis of growing your wealth over time and. Depending on what you invest in, it can also create steady sources of passive income.
Some people think they can invest with little or no knowledge of what they are buying - but this strategy rarely pays off over time. Wise investors will do their research before investing in any asset because it is important to understand the investment fully before committing, especially if you're in it for the long haul.
That said, investing is just like any other skill - it takes time and practice to learn. The only difference is that if you choose the wrong investment, you'll end up losing your money. To help avoid that from happening, today I'll share with you my 7 steps to choosing wisely when investing for the first time.
What is investing?
Investing is the process of using money or capital on an asset with the hope to gain a profit or another desired outcome in the future, be it near or far. Some common types of investments include:
People tend to confuse investing with trading. However, while both imply using your money strategically to make more money, some key differences exist.
The difference between investing and trading is that traders invest in stocks, currency pairs, cryptos, and other assets, which you can buy and sell at a moment's notice. Traders make their money by "buying low and selling high." They buy stocks or commodities when the price is low, hold them until the price rises, then sell for a profit and move on to the next asset. In contrast, investors buy stocks or invest in other assets because they believe in long-term potential.
The importance of investing
Investing is important because it helps to grow your money over time. As a result, less of your income gets eaten up by inflation, and you have more money available at retirement. In the meantime, some investments will help create sources of passive income. For example, some stocks and bonds pay dividends when they increase in value, generating income without any input from your side.
Finally, investing is also a smarter way to prepare for emergencies since you can tap into your investments without paying any penalties, like the ones you pay for withdrawing early from your pension fund.
How to start investing
If you are just starting to invest or are interested in starting, then here are some important considerations you should be aware of.
First, budgeting is essential to invest. It's important to know where your money is going every month. That'll make it easier to know how much money is available to you for investing. It's also important to save a couple of months' worth of living expenses in an emergency fund before you start investing so that you can avoid taking on too much risk.
Second, once you've saved some cash and are ready to get started, it's important to know how long you plan to invest or the investment timeframe since that will make it easier to define the best type of investment for your particular situation.
Finally, it's also important to choose how you plan on actually making your investment. For example, if you want to invest in financial markets, you'll need to choose a broker. Other logistic aspects to investing are also important, like the bank you work with, applicable taxes, etc.
7 Steps To Making Wise Investments As A New Investor - A.K.A Picking Winning Assets
Step #01 - Learn about the financial markets.
While some keen investors out there have a sort of sixth sense about what investments will go up or down, this is a rare skill. Knowledge is by far the most important aspect of choosing a winning stock. Consequently, the first thing you'll want to do before you start investing is to learn all you can about the financial markets and how they work.
This means learning everything from the different types of assets, their average growth, how they're bought or sold, what fees are usually associated with each transaction, and much more. There are tons of books published about the subject, and thousands of blog posts like this one, so you'll have a harder time choosing what to read than finding information.
If you start feeling overwhelmed about having so many options, it's a good idea to look for advice on what to read from renowned figures in the field. Warren Buffett, CEO of Berkshire Hathaway, one of the most famous investors of our time, frequently recommends good reads about Wall Street, investing, and the financial markets.
Step #02- Establish your financial goals and risk tolerance.
Before you start investing, you need to figure out what your financial goals are. This will help determine how much money you should invest and also if this investment makes sense for the amount of risk you're willing to take on.
Are you investing because you want to retire early? Is it to pay for your kids' college? Answering these questions will allow you to analyze your options more objectively.
It's also important to figure out how much risk you're willing to take for the sake of building wealth. Risk tolerance usually defines the types of assets we invest in. For example, stocks are usually riskier investments in the short term, but they also offer the possibility of greater returns compared to bonds which are low-risk assets that let you hedge against inflation and payout regularly in dividends.
Step #03- Choose the right type of financial instruments or assets.
Before actually choosing the particular asset or assets to invest in, you need to decide the type of assets best suited for your goals and risk tolerance.
You'll want to decide if you're looking for long-term or short-term investments. For the former, stocks are one of the best options. Stocks may be volatile during any given year but historically have grown at about 9% to 10% annually, on average, which makes them an excellent long-term investment.
For short-term investments, bonds are a safer option. These assets help insulate your money from market volatility and allow you to earn some interest income along the way. Another option is to keep investing simple with Exchange Traded Funds or ETFs, which are baskets of stocks that can help you diversify across different industries and companies.
Step #04- Know your circle of competence.
In investing, it's important to have a circle of competence. This is a term that Warren Buffet coined and basically means sticking to what you know for the sake of making smarter investment decisions. For example, if you're a travel blogger who knows a lot about the industry, it makes sense to invest in airlines or tourism stocks.
Similarly, if you work in marketing and have a lot of expertise in marketing strategies and tactics, you can invest in companies that are marketing-related like Facebook or Amazon Web Services. It’s another way of saying that when it comes to investing, you should stick to your niche.
Step #05- Look for investment advice.
No matter how much you read, study, and prepare, your lack of experience may take you down the wrong path if it's your first time choosing an investment. Therefore, it's important to seek advice from seasoned investors who already know what they're doing.
One great way to get this kind of advice is to sign up for an investment newsletter. These are periodic publications written by acclaimed investors sent your email, which covers topics like global news that could affect asset prices, laws that could affect entire market segments like real estate or energy, as well as a list of recommendations of companies, commodities, or other assets to invest in.
The best thing about these newsletters is that they provide a full analysis of why they consider their recommended assets to be good investments, which helps you learn about what information you need to look for and how to treat that information when you start investing in your own.
Step #06- Do your own research and due diligence.
Even if you get your advice from the best investment newsletter, as I suggested in the previous step, you should never follow any advice blindly, not even if Warren Buffett himself walked up to you with a piece of paper urging you to buy this or that stock. In the end, it's your money that's at stake, not theirs, so it's your responsibility to treat that information as what it is: advice that should be cross-checked and verified to see if the claims hold any water.
The above basically means doing your own research to see if all the data on which a recommendation is based is true and if the arguments they propose make sense. Never invest based on someone else's "hunch" or "gut feeling," only on hard facts that you verified yourself.
Step #07- Create a plan and stick to it.
If you did your homework correctly and followed the previous six steps, you should now have a clear idea of what to invest in, so now it is important to create a plan and stick to it, even if things don't always seem to be going your way.
For example, if you're investing in stocks, it's normal for prices to rise and fall, sometimes abruptly, tempting you to sell your assets, which could ultimately make your entire plan fail.
Additionally, sticking to a plan will increase your chances of success because you are focused on achieving your goal rather than trying different things here and there.
The Bottom Line
The bottom line is that the best time to invest is now, but you need to do it intelligently. If you've never invested your money before, you can make wise investments today by learning about financial markets and managing risk tolerance while staying within your circle of competence. Following these steps as a new investor will make it easier for you to choose wisely when making investment decisions in the future.
Wise investors know there's no such thing as an overnight success; they also understand that opportunity often comes disguised in routine tasks and boring details like keeping track of investments, researching companies, and staying on top of the news.
Building wealth isn't easy; it takes time, effort, and the right knowledge to be successful. As a new investor in the financial markets, being prepared is your first step towards building long-term wealth through wise investments. You can avoid making costly mistakes by doing your research, managing risk tolerance, and staying committed to the long-term goal of growing wealth.
October 21, 2021
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October 15, 2021
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October 27, 2021