For those who have yet to dip their toes into that particular pond, the concept of investment can be pretty intimidating.
Many of us imagine Leonardo DiCaprio in The Wolf of Wolf Street – lots of men shouting down the telephone and looking at screens full of numbers, or complicated graphs.
Not only that, but the risk involved can also be scary. Who knows if the money that you are going to put in will make you money, or is even legitimate to begin with?
However, if done right, investments can be pretty straightforward and can help to set you up for life.
Perhaps you are hoping to make a passive income alongside your regular job, or maybe you are looking for something to fund you through your retirement years.
Perhaps you want to leave your children with something to help them in their lives after you have gone.
Whatever reason you have for wanting to set up an investment portfolio, here we share some tips and tricks to help you get started with building a portfolio that will set you and your family up for life.
Have a clear goal to work towards
Before you do anything else, you need to think about what it is you want to get out of your investment portfolio.
Are you hoping for capital growth, an income, or a combination of the two?
What it is you are looking for as an end result will have a bearing on the type of investment that you go for.
What level of risk can you tolerate?
One of the main principles of investment is the risk versus reward payoff.
There is never any guarantee with any form of investment, so the risk will always be a factor, but as with anything, some types come with more risk than others, and this is something you need to take into consideration.
Generally, higher-risk investments will give you a higher return – otherwise, why would anyone ever bother taking the risk in the first place?
However, that is never a guarantee and is something that you need to be prepared for. Can you afford to take the hit if it does not quite go to plan?
What you need to consider is the volatility, which is how much your investments will potentially fluctuate in value.
When it comes to volatility, the length of your investment can make a difference.
If you are investing the money in something, for say, ten or more years, you can tolerate higher volatility.
This is because there is more time for the investment to recover from any short-term fluctuations.
Have you thought about asset allocation
We will cover why diversification is crucial and the different ways of building a diversified portfolio below, but the allocation of assets is one of the key points of portfolio creation.
You might opt for stocks and shares and bonds, property, or something tangible such as fine wine, art or precious metals.
You can check out some of the Noble Gold Investments reviews here if gold is something you would be considering.
What is investment diversification, and why is it important?
Ploughing all of your allocated funds into one form of investment can be incredibly risky.
If you put it all into property, for example, and the property market collapses, your money might as well go down the drain.
However, if you have a bit of money invested in property, some in stocks, others in cryptocurrency, you are not risking all of your money disappearing at the same time.
You have heard of the saying ‘don’t put all of your eggs in one basket’? Well, that is precisely what we are talking about here.
Once you have chosen how to allocate your funds – say, for example, in shares, you can then diversify by sector.
You may want to buy shares in banks, which is fine. However, if you pour all of your share allocations into the banking sector, and there is a financial crisis like the one in 2008, the value of your shares will dramatically tumble.
In this case, you may want to buy shares in various sectors – healthcare, precious metals, technology and so on. Then, if one industry collapses, it is not going to affect all of your shares.
You also should consider spreading out your investments globally. By investing in different regions, you are not limited by the stock market of one country or the economic policies of a particular government.
However, this can also add an extra dimension of risk to the process.
What are some of the things you could consider investing in?
People have been investing in property for as long as they have been building houses because it is a generally low risk and high return form of investment.
There are several ways in which you can invest in property, from buying and selling, renting out for either residential lettings, commercial or vacation lets, or flipping.
The advantages of this form of investment are that it is relatively stable when compared to other types.
The sale of property takes time and is always in demand, making it much less volatile. You also have the opportunity to leverage your investment, meaning you can buy more with less.
Generally, with a property, you put a deposit down, and your bank lends you the rest.
The downside is that it is not very liquid – you cannot access your money at the drop of a hat if it is tied up in property.
It can take weeks or even months. It also has high entry costs, as to get a foot in the property market can cost you thousands.
It is relatively new, having only been around for a little over ten years, but so far, it seems to be a pretty solid investment.
Those who took the plunge early on are seeing huge returns on their money. In July 2015, the price of Bitcoin was just over $280. In December 2017, it was $17k.
The disadvantage with cryptocurrency is that being so new, it is difficult to make any long-term projections about how it will do, so the element of risk is high.
It can also be volatile – there have been periods where the value has shot through the roof and then dropped quite dramatically before jumping back up. Being an intangible asset, this can make many potential investors nervous.
Stocks are one of the most popular and common forms of investment. They are easy to buy and accessible to the vast majority of people.
You can purchase them through a stockbroker, a financial planner, or you can buy and manage them yourself online.
You can make money in two ways – as a day trader or a buy and hold investor. Both buy low and sell high, investing in fast-growing companies whose value is appreciating.
Day traders hope to take advantage of short term trends while buy and hold investors expect to see their return grow over a more extended period of time.
One of the good things about stocks is that they are incredibly liquid – they can be sold quickly and easily so you can access and use your money.
However, investing in stocks does come with risks. If you have invested significant amounts of money in one company and they don’t do well, the value of their shares will plummet and with that your money.
There is also the risk that, if the company goes into administration, as a stockholder, you will be at the bottom of the list to receive your money.
As with property, precious metals such as gold, silver and platinum have been used as a form of investment for many years due to their inherent value.
Platinum can be quite a volatile investment, so most people tend to spend their money on either gold or silver, both in bullion form, which can be measured in weight, or fine jewellery.
Coins also hold their value and can be a collectible asset. Gold tends to keep its value even in periods of economic uncertainty and can be traded in quickly if the money is needed.
Knowing what form of investment to go for depends on a whole range of factors: your appetite for risk, the liquidity of the asset, the entry fee and it’s volatility in the short and long term.
You also need to consider how hands-on you want to be – do you want to buy it and leave it to do its thing and make money, or do you want to be involved?
Before making any significant investment, talk to a financial advisor and weigh up the pros and cons.