Beginner Investment Guide: 4 Things To Consider Before Making Your First Investment Decision

beginner investment

Gone are the days when there were only a handful of investment options available. 

Now, there are a plethora of assets and options one can invest in. However, making the first investment decision is still a challenge, and many people struggle to get it right the first time.

According to Forbes, over 6 percent of Gen Z and 65 percent of millennials find investing in the stock market very intimidating. (Of course, there are so many numbers involved in stocks)

Yet, saving and investing your money early on is highly advised. According to Financially Simple, if you wait till 45 to begin saving and investing, you will need to put in thrice the effort compared to if you had started at 25.

So, one thing is for sure – you must invest in the right assets early-on in your life for maximum returns. But how do you make your first investment decision? Here are things you must consider:

  1.     Start by planning

One of the biggest mistakes novice investors make is to dive deep into the world of investment without first gauging the depth of it. Don’t just buy stocks because everyone else is doing. Instead, take a step back and plan.

First, define your goal. Ask yourself, why are you investing in the first place? Is it to reap short-term returns? Or, are you interested in long-term securities?

Once you define your goal, you will be able to shortlist investment options accordingly. To decide the financial instruments to invest in, you must conduct thorough research. Only invest in tools that you fully understand and ones that offer sustainable growth.

After you have done the research, you must decide how to invest. Remember, just because one option seems profitable doesn’t mean you should invest all your money in it.

Always minimize risk by diversifying your portfolio. And you must keep a tab on your portfolio.

Managing a diversified portfolio can be tricky for a beginner, but a good Investment Portfolio Management Software by Ziggma can help you here.

It will allow you to track the health of each of your investments to see when it is time to divest and redirect your money somewhere else.

  1.     Evaluate the risk you can take

Risk is involved in every financial instrument. Apart from treasury bills, as provided by governments, there is no such thing as a risk-free investment. By the rules of finance, “the more risk is involved, the higher is the return.”

What do we mean by risk?

Well, in layman terms, the risk of investment is the chance that you might lose some or all of the money you invest. The lower the risk, the lower the probability of you losing your money.

To ensure returns, you need to take a certain level of risk. You must decide what this level is. Identify your comfort zone. Look at your current financial standing and gauge how much loss you can take without it gravely affecting your lifestyle.

Remember, just because an instrument is risky doesn’t mean you will, by default, lose money. It is just a scenario that might or might not happen. 

But why would you take a risk? Do low-risk securities not reap returns?

The returns of low-risk securities are generally lower than high-risk securities. Usually, if your investment goal pertains to getting returns over a long time, you might want to invest carefully in high-risk assets, like stocks and bonds. But, if you want liquidity and low-risk short term investment, cash equivalent will be the right choice.

All in all, depending on the level of risk you are comfortable with, you will be able to narrow down further the available instruments you can invest in.

  1.     Take your age into account

Some people make their first investment well into their 40s. Others do so the moment they land their first job in their 20s. Your age is a factor you should take into account before making your investment decision.

For instance, let’s say you are a millennial. The time is on your side. You are healthy and young so that you can wait longer for your investment returns. Additionally, being young means that you don’t yet have the burden of responsibilities and hence have more disposable income for investing.

So, you can select instruments like bonds and stocks which are riskier but which reap better earnings. Additionally, these instruments end up giving you more returns because of the “compound interest.”

On the other hand, let’s say you are a middle-aged individual who is close to retirement. You have now started thinking about saving for the grey days. 

Here, the time is not on your side. You need to invest the maximum amount. And you don’t have the chance to restart your journey so you must invest in safe instruments. 

So, your age plays an integral role in deciding how much risk you can take.

  1.     Don’t fall in the debt-trap

One of the biggest enemies of investment and success is debt. It is a vicious circle, from which – once you get in – it’s hard to come out. 

Yet, many are trapped in it. According to the New York Federal Reserve, millennials alone have accumulated over 1 trillion USD worth of debt.

debt statistics

Millennials often crave quick success and easy returns, and hence don’t think twice before purchasing things on Equated Monthly Installment (EMI). EMI is a payment that a borrower has to pay to the lender at a specified date every month so that over the years, the loan is paid off completely.

Credit cards are also one of the reasons millennials are in debt. The more limit your credit card has, the higher the interest rate it charges you. Think of this money as the money you now have to pay, which you could have otherwise invested in a financial tool for returns.

So, always keep your purchases and temptations to borrow money in check. Invest rather than borrow.

Ending Remarks: Have Fun!

As a beginner investor, it is easy to feel overwhelmed and stressed about your investments. But, once you truly understand how a given instrument works, you will enjoy the process.

So, consider the four things mentioned above. Plan your investment. Define your goals. Choose your instrument depending on your age and risk-taking ability. Be wary of the debt-trap. 

Invest in different instruments and diversify your portfolio.

Do this, and you will just have to sit and watch as your money grows.

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