If you’ve been a part of lunch break conversations lately, they’re likely to revolve around three things – Promotions, Cryptos and Investing. And if you’re still shying away from investing you’re likely to ask yourself – Am I doing life right?
Adulting can get hard at times. In a world of constantly inflating prices, having a second passive income that does the earning for you is an incredibly underrated superpower.
The decision to start investing is a watershed one. One that most people fail to take early on in their financial journeys. One reason behind this is that we’re pretty scared of investing. To be fair, the idea of putting your money into asset classes whose prices are infamously known to fluctuate can be a little intimidating, but that’s certainly not a reason enough to not invest.
In simple terms, investments are things you purchase and put your hard-earned money into with an expectation of a profitable return. A large section of people choose from four main types of investments popularly known as “asset classes”. These include shares that allow you to buy a stake in a stock listed company, cash which includes the savings in your bank account, real estate which is about putting your money into a property for residential or commercial purposes, and bonds which involve loaning your money to an institution.
If your eventual goal is financial independence, saving money under your pillow is certainly not going to attract any tooth fairy. You’ve got to make your money to earn more money. This is the basis of the principle of compounding that drives the concept of investing.
Compounding is what Albert Einstein deemed as the “eighth wonder of the world.”
To understand the power of compounding, imagine a snowball that rolls down a hill. The higher the hill, the more snow it slowly captures and the larger it gets. That is how compounding works. The longer period of time you give to an investment, the larger returns it gets you. You get your original investment alongside the return that you make each year which lends you more interest. This is the snowball effect.
Here’s a list of four early investing considerations to keep in mind while beginning your investing journey.
1. Start on a clean slate
Before you get into the world of investing make sure you’ve paid all sorts of expensive debts on you. These could include a credit card bill after a month of retail therapy or overdrafts you might have collected over time.
If you fail to do this all your interest payments may end up offsetting your investment gains.
Having a rainy day fund for contingencies will also help you mitigate the big blows of the volatility of the markets.
2. Ask yourself – How involved do you genuinely want to be in the process?
Only you can be honest about how much mental effort you can allocate to investing. The journey can get tedious at times, and the markets’ volatility can make you bite your nails a little more often. If you’re motivated enough to build your plan from scratch – you may have to pick your own shares. This involves research. A lot of it.
However, if that’s not for you, you can opt for different pathways.
- You can buy actively managed funds and hire freelance professional stock pickers to select investments on your behalf.
- You can put some money into an exchange-traded fund that simulates the ups and downs of the market.
Experts suggest that doing your own research might be your best bet, but knowing that you have alternate options always helps.
3. Diversify your basket
The present-day equivalent of putting all your eggs in one basket is putting all your money in a single stock.
Diversification is the golden rule of investing. It means having a wide range of assets that are likely to have different progress reports in different conditions.
It is built on the assumption that markets are bound to be fluctuating. So even if one of your stocks tanks, you must have some safety sectors buttressing its downward graph.
You can diversify your portfolio by
- Asset classes – For instance, buying shares alongside a gold-based mutual fund.
- Sector – Invest in different economic sectors. Throw in some pharmaceuticals besides the FMCG sector. Try out permutations and combinations till you feel like you’ve cracked the market sentiment.
- Geographical Sectors – Take advantage of the Startup boom in India while also relying on the stability of American MNCs.
While there isn’t an ideal number of stocks that you must own, financial experts suggest that anywhere between 10 to 30 is a good range to experiment within.
The one rule of thumb to wear by is to attempt to achieve enough diversity in your portfolio to be able to protect yourself from losses while also not spreading your investments way too thin.
4. Calculate your risks
It’s no secret that performance in the stock markets is prone to risks and fluctuations. While forecasting trends can lend you some certainty, it will never be a hundred percent sure shot.
Your ability to take risks is a sum total of various factors like your income, your current financial status, your goals, and your responsibilities. It’s important to factor in all these considerations before jumping into your pool.
There is absolutely no trouble in starting small and taking steps in the manner you deem right. The goal is to stay consistent, to give space and time to your investments to mature, and to stay at it.
Learning how to invest in a curvilinear path with its own little milestone steps. However, you can still be on your way to creating wealth once you get the hang of it.
Going through different investment-based websites, reading the fine print before investing carefully, and testing out different brokers and trading apps are all a part of a learning process. As a freelancer, or a working professional starting out in your career you must have a firm understanding of your risk tolerance and the financial goals that you wish to achieve.
The start of the investing journey can be intimidating, overwhelming even. But it’s one of the few things in life that gets better with age and time.