When you have money that you want to invest, how do you know what you should do with it? There’s a world of options you could choose from that includes everything from buying boring old government bonds to more exciting (but potentially dangerous) investments like meme stocks, real estate, and cryptocurrency.
The truth is that there will always be winners and losers when it comes to all types of investments. And knowing which one you’ll be will depend on a variety of factors; not just with the investment itself but also with you, the investor.
In this post, I’d like to explore how to decide what to invest in through five questions that you’ll want to ask yourself.
1. What Are Your Goals?
The first question you need to ask yourself is: What is it that I want this investment to do for me?
In other words, what are your reasons or goals for investing? Do you want to:
- Become rich as quickly as possible?
- Build long-term wealth?
- Retire by a certain age?
- Start your own business?
- Build a legacy that you can leave to your family?
Ultimately, the direction you’d like to go will determine what kind of investment would be the best one to complement your situation.
Your time horizon will also play an important role alongside your goals. For example, if you’re in your 20s and you’d like to retire in your 60s, then you’ve got plenty of time to save and invest. That’s good news because it means you can save modestly and invest conservatively.
However, if you’re in your 40s and would like to retire in 15 years or less, then your time horizon would be much less. In that case, you’d have to save much more aggressively and be willing to invest in funds that may be riskier but would also offer the highest chances of growth.
2. How Much Do You Have to Invest?
The amount of money you have to invest is also something that will dictate what you can invest in. This is because some assets require more capital than others.
For instance, let’s say your goal is to start building a rental property empire. Before you can buy your first home, you’ll need tens of thousands of dollars for a down payment. In addition, you’ll probably need several thousand more for renovations, insurance, and other business costs. If all you’ve got is $1,000 to invest, then unfortunately buying a property wouldn’t be an option.
To illustrate a more extreme example, most hedge funds and private equity companies require you to be what’s called an “accredited investor” meaning you’ve got at least $1 million in assets (not including your home). As you can see, you need a lot of money to get into this game.
Stocks with high share values also used to be hard to purchase if you didn’t have much money to invest. This is because in the past you could only buy whole shares.
Thankfully, in recent times, that’s changed. Now you can invest just a few bucks and buy what’s called “fractional shares”. This is a huge opportunity for people who want to buy expensive tech stocks like Google and Amazon but never could have afforded the high prices.
3. What Do You Understand?
You don’t have to know every technical detail about how an investment works in order to buy it. But at a minimum, you should have some basic understanding of what it is and why it would make a good investment. If you don’t, then you make be just blindly pouring your money into something that could turn out to be completely worthless.
Take for example the recent trend with cryptocurrency. Lots of people are putting money into Bitcoin because of its incredible run-up in price over the last decade. However, it’s been reported that one in three are doing so even though they know absolutely nothing about it.
That’s a dangerous way to invest because it means they’re just buying it with the hope that it will go up in value. That’s more like gambling rather than investing.
Instead of going for niche markets like crypto, I’d recommend sticking with the basics. Get to know trusted financial products like mutual funds and ETFs, and use retirement accounts to save a bundle on taxes in the process.
In the meantime, if you want to educate yourself on other types of investments like stocks, real estate, or even crypto, then go for it. Just make sure you do your research, read a few books, and invest small amounts before jumping in too deep.
4. How Comfortable Are You with Risk?
If the stock market were to collapse like a did back in the Great Recession of 2008, how comfortable would you be seeing approximately half of your portfolio’s value disappear?
You might think right now that you’d be okay. But the truth was that a lot of people panicked. In fact, many of them ended up selling their investments and cashing out their retirement plans to salvage what was left. When it comes to investing, that’s exactly the opposite of what you want to do because you’ll effectively lock in your losses.
Behavioral investing is a real thing. Understanding how your emotions will play a role can help prevent you from making a huge mistake later on. If you don’t have the stomach or the time to wait it out, then save yourself the trouble and go with more stable investments instead.
5. Be Reasonable
In the financial community, there’s no shortage of people who will tell you that they know how to double your investment or beat the market. However, if it were that easy, then everyone would be rich.
We know from index funds that large-cap stocks historically produce an average return of around 10 percent per year over the long haul. Very few mutual funds or ETFs ever beat their market index. So anyone who tells you they can “beat the market” is probably going to sell you on a false promise.
The best thing you can do is be boring. Stick to investments that have a proven performance and produce reasonably consistent results. Yes, it’s slow. But remember investing is a marathon and not a race.
If you do decide to invest in any securities or retirement funds, then you’re going to want a way to keep track of their performance, especially if you’re using multiple platforms. That’s where an app like Buxfer can help. Buxfer lets you connect to thousands of different banks and financial institutions so that you can always have real-time data about your investments.
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