New to investing? Here are some tips before getting started

Author: Brian Spinelli

Source: Kiplinger

If you’re new to investing, it can seem overwhelming and leave many wondering where to start. You may hear about friends investing or trying to buy a rental property or hear about employer retirement plans at work. Then you go looking and realize the number of options out there seem endless. How do you even choose?

Read on for some tips for navigating the complex world of investing.

Begin with an end in mind

Before you consider investing money, you need to develop a strategy that is tied to a goal or set of goals. Part of developing goals is also setting out a time frame to try to achieve them. For example, if someone in their 20s wants to buy a home in five years, that is a different goal than someone of a similar age trying to save enough to retire at age 50. While both are great financial goals, they should come with different investment strategies.

Setting the time frame is important. While you may hear instances where investments make people a lot of money quickly, those generally are outliers. Most investors build their wealth over time with discipline and saving. If you have financial goals that are short term, say, under three years, you might need to use a strategy that involves taking some risk and potentially losing money.

While this strategy does not usually yield high returns on your money, it does generally ensure that the money is there when you need it. It is very tempting when you hear about people making a lot of money investing to jump in for a short period of time, but the odds of getting the timing just right are very slim. You could be stuck needing the money you saved only to find it’s currently less than what you started with. Time frames matter!

If you are investing in assets like stocks of companies, they can have large price fluctuations in short periods of time. Assuming you are investing broadly, your chances of not making money do generally diminish with longer hold periods beyond five years. So, before you consider any investment strategy, start by defining a time frame for the money in question.

Understanding expectations and your behavior

Along with the time frame, also consider your expectations and behavior. When choosing an investment strategy, it’s highly likely you will encounter tough periods over time, especially if it’s a long investment time period. If you are ever putting money at risk for a higher return than you can get on a high-yield savings account, you need to be prepared for periods where your value may go down.

It isn’t out of the ordinary to have broad stock markets go down 20% in a short period of time, as an example. Generally, they recover with time, and it is important to assess how you would react when faced with a market downturn. Would you feel compelled to jump ship? Would it give you stress and anxiety? If you think you will not be able to ride it out, then that might not be your sole strategy to pursue.

Know your convictions

Investors who either don’t know they are taking risk or have tremendous conviction might be invested in only one sector of the market, a single investment or their company stock. This is neither good nor bad, and each investor’s circumstances are different. There is a big difference between having a million dollars of net worth invested this way vs. a few thousand dollars for someone just starting out.

Sometimes, employees of companies accumulate large sums of stock as part of their compensation, and it is not as simple as just selling and spreading the money over many investments. Generally, concentrated stock strategies can have both a much larger upside and downside than diversifying and spreading money over many different types of investments.

Consider liquidity amid alternatives

While many investments offer liquidity benefits, alternative investments are a great approach to a diversified investing strategy. Many investors are already sitting on a largely illiquid asset: your home! This is not a bad thing, but it is very difficult to turn physical real estate into cash the next day.

Real estate is just one form of an alternative illiquid investment. Private ownership in a business is another. Other illiquid investment alternatives could include private credit, private equity, art and hedge funds.

The point of bringing up liquidity is that it’s important if you have money tied to goals that are near-term. It is less important if you don’t need the money in five years or more. Illiquid investments can be a portion of an overall strategy, but pay close attention that you have enough liquid assets to meet those shorter-term goals.

This article was written by Brian Spinelli, CFP® and AIF®, from Kiplinger and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.