A successful investor can find opportunities in even the bleakest economic environment. However, an investor who isn’t careful can lose money just as easily as one who doesn’t try at all. Whether you’re new to investing or have decades of experience under your belt, be sure to consider these five things before making any investment decisions.
Understand your financial goals
If you’re investing with a purpose—for example, if you’re saving for a big purchase, college or retirement—understanding your goals is critical. Knowing your endgame will help ensure that you aren’t acting too aggressively (or not aggressively enough) and will help keep you on track. What is your target investment horizon? When do you plan to retire? When do you need to save for college?
Understand risk tolerance
The first thing you need to think about before starting your investment journey is your risk tolerance. What does that mean? It means how much risk you’re willing to take in order to potentially earn more returns. For example, if you are 25 years old and have a long life ahead of you, it would make sense for you to invest in growth stocks with high potential returns but also big downsides that could really hurt your portfolio balance down the road if things don’t work out.
Know when you need help
There’s a time and place for investing without guidance. However, if you’re just starting out and have very little knowledge of what you’re doing, make sure to contact an expert (like a financial planner) before making any investments. You don’t want your first investment experience to be your last.
Have an overall strategy in place
Whether you’re investing for your retirement or for a bigger house, it’s important to have an overall strategy in place. While it might be tempting to dive into investment decisions and start buying individual stocks or mutual funds without a plan, having a strategy that makes sense for your situation is critical. For example, if you’re saving for retirement, you might decide to invest in low-cost index funds instead of trying to beat the market by picking individual stocks. If you want to buy a home with your investments, then choosing real estate investment trusts (REITs) over individual properties can help diversify your portfolio and reduce risk while still providing potential growth. In other words: A little planning goes a long way when it comes to investing.
Only invest money you can afford to lose
One of the biggest mistakes beginning investors make is investing money they cannot afford to lose in hopes of becoming wealthy overnight. This is a recipe for disaster and should be avoided at all costs. If you do not have enough money set aside that you would not miss if it was gone, then you are likely setting yourself up for failure. If you are going to invest, take a long-term approach and only invest what you can afford to lose.