Putting your money to work is one of the best ways to grow your savings. Investing can help you achieve your long-term financial goals sooner, rather than later.
Even so, many people shy away from investing because they assume it’s too complicated or risky. The truth is that investing is accessible to almost anyone with a little bit of cash and determination.
You just need the right information to get started on the right foot. Remember this old saying: “Knowledge is power.” Well, in this case, knowledge about common mistakes will empower you to become a better investor and grow your money faster.
Research is the key to investing successfully
The best way to make sure you’re making good investment decisions is to do your homework. Successful investing starts with knowing the right questions to ask.
What businesses are you investing in? What risks do they face? What are their competitive advantages? What are their products and services? What are their profit margins? How is their cash flow? What is their debt-to-equity ratio?
By asking yourself these questions and researching the answers, you’ll gain a greater understanding of what makes companies profitable and how they make their money. This information will help you make better decisions when it comes time to invest.
Don’t invest your money all at once
If you’re just starting to invest, you should think about your investment strategy as if you were putting together a puzzle. The key is to fit pieces of your puzzle together so that when the time comes, you can easily and seamlessly take them apart and make the most of your money.
For example, let’s say you have $5,000 in a savings account. At your current savings rate, it will take you about five years to grow that cash into $10,000. If you invest that money in a low-risk investment like a money market fund, you can earn more interest and have $10,000 in one year.
By investing your money all at once, you can use the additional cash in less than a year to buy a new investment, such as a stock or bond fund. Once the money in your savings account grows, you can use it to buy more pieces of your puzzle and increase your overall investment portfolio.
Know what you own and why you own it
Investing is all about risk and reward. Before you buy stocks, bonds or other investments, be sure you understand how they are expected to perform over time.
If you don’t have a solid grasp on what you own, you won’t be able to make sound financial decisions, such as when to sell your investments or what to do with proceeds from shares you’ve sold. What’s more, you should have a clear understanding of why you own each investment.
What’s the investment’s purpose? How will it help you meet your long-term goals? What is its risk profile and how does that compare to your other investments? How do the expected returns on this investment compare to other investments you’re considering?
By having a clear understanding of what you own and why you own it, you can make better investment decisions that will help you meet your long-term financial goals.
Diversification is a good thing
Diversification is simply investing in a variety of different assets to help reduce risk and increase returns. In short, it means not putting all your eggs in one basket. There are many ways to diversify your investment portfolio.
You could invest in multiple stocks from different industries, such as healthcare and tech. You could also invest in different types of bonds, such as government and corporate. Another option is to invest in different types of real estates, such as office buildings and apartment complexes.
Diversification can help you achieve a greater investment return with less risk. It can also help guard against a specific investment type, such as stocks and stock funds, falling in value.
Stay away from high-fee investments
You’ll find that most financial institutions charge management fees (also known as expense ratios) to manage their funds. While this may not sound like a big deal, over time these fees can add up to a significant amount of money.
Additionally, the fees you pay may come directly from your profit. Investment fees come in different forms, including management fees, sales fees and trading fees. Management fees are charged to cover the cost of managing the fund. Sales fees are paid to investment advisors and broker-dealers who sell you the fund.
Trading fees are charged each time you buy and sell shares. Investment fees can vary greatly between funds. For example, actively managed funds typically have higher fees than passively managed funds. By investing in funds with lower management and trading fees, you can keep more of your hard-earned money and make more money in the long run.
Don’t be greedy
The investment saying, “If it seems too good to be true, it probably is,” is worth remembering. If you’re offered a seemingly lucrative investment that doesn’t make sense, be careful. It may seem like an easy way to make a quick buck, but it could be nothing more than a scam.
Investment fraud is very real and can happen to anyone at any time. Some of the most common scams include penny stocks, unlicensed brokers, Ponzi schemes and online fraud. Investment fraud can be particularly harmful to unsuspecting young investors.
According to a Transamerica survey, nearly one-third of millennials reported losing money due to investment fraud. By being alert and aware of common investment scams, you can protect yourself and your money from scammers.
Conclusion
Investing your money can be a great way to grow your savings and achieve your long-term financial goals. The best way to make sure you’re making good investment decisions is to do your homework.
You should also remember to diversify your portfolio to reduce risk and stay away from high-fee investments. Finally, don’t be greedy and don’t let greed cloud your judgment. Instead, make smart and strategic decisions that will help you reach your financial goals sooner.
