Most people equate investing with the stock market. If you’re interested in investing as a beginner, you should know that it’s best to diversify your financial portfolio by investing in multiple assets. Diversification is a type of risk management tool. The concept behind diversification is that when you build a portfolio with different types of investments, you’ll earn higher returns over time and experience lower risk than putting all your eggs in one basket.
A diversified investment portfolio includes stocks, bonds, mutual funds, and cash equivalents like money in a savings account, money market instruments or Treasury bills. All investment portfolios should include these three asset classes.
However, some financial advisers recommend the addition of alternative assets like real estate, foreign exchange (currencies), commodities, precious metals, or collectibles like stamps and coins. Other advisers say that a small portion of the well-balanced portfolio should include fine art.
If you’re new to investing, an experienced financial adviser can help you create an investment portfolio.
Investing vs. Trading
If you’re a beginning investor, start with the top three financial assets to build your portfolio for the long-term. Investing implies you’re willing to let the wealth building power of financial markets increase your capital over time.
Unlike traders, long-term investors believe that time in the market, not market timing, builds net worth. Generally speaking, trading financial assets increases portfolio risk.
Consider risk before you invest. Answer the following questions to assess your risk appetite:
- Are you willing to take higher risk to achieve higher returns over time?
- Do you plan to build a portfolio all at once or will you add to positions if a buying opportunity presents?
- Can you afford to lose capital?
- How many years do you have until retirement?
- Have you funded a tax-deferred retirement account, such as a personal Individual Retirement Account (IRA) or an employer-sponsored 401k plan?
- Are you most comfortable buying high-quality stocks that pay dividends and investment grade bonds?
- Have you considered the impact of costs like commissions and sales charges on your returns?
- Will you purchase low-cost index funds or no-load mutual funds instead of buying individual stocks and bond issues?
Let’s discuss why your answers are important to your investing future.
Financial assets rise and fall in value according to market conditions, investor sentiment, and supply and demand. If you’ve got 30 years or more until retirement, you may be able to absorb more risk. You might not care about dividends or bond interest. You aren’t investing money needed for another purpose.
Deciding to invest in growth stocks doesn’t imply a preference for low-cost stocks. It means you’re willing to search for companies that may increase in value over time.
For instance, if you believe that robotics companies are the wave of the future, you might select several individual names or buy a mutual fund to participate in the long-term growth of artificial intelligence and robotics stocks.
Investing in bonds might seem counter-intuitive to new investors. Bond yields are near historic lows. The Federal Reserve has announced that rate hikes are going to happen over the short-term because the economy is doing well.
To diversify your portfolio, consider short or medium-term bond maturities. If you’re looking for higher returns in this maturity range, consider special situations bond issues. Special situations bonds often trade more like stock but, because they’re bond loans of the issuer, you earn bond interest. Bond yield adds to your total portfolio return.
A growth investor is willing to commit capital for at least one to five years. Most growth investors have longer investment horizons.
Regardless of your age to retirement, you will want to retire one day. Uncle Sam allows investors to grow capital without the impact of taxes until it’s withdrawn in the future. Your money should grow more quickly without the need to pay capital gains. Some retirement plans allow you to invest after-tax funds but withdraw the money tax-free.
Fund your retirement. It’s one of the best reasons to invest for the future.
If you like the idea of investing in quality blue chip stocks and investment grade bonds, you’re want to own less volatile financial assets. Look for stocks with high dividends or buy a no-load stock mutual fund. If the capturing the broad return of the stock market interests you, consider an index mutual fund.
Recognize that the costs of owning an asset affect your net return. Check mutual fund sales charges and expense charges before investing.
Before You Invest
Investing for the future is a wise decision. Take the time to learn as much about stocks, bonds, and cash equivalents before you invest. Limit a specific percentage to alternative assets if you plan to invest in them. Diversify the portfolio for long-term returns and lower risks.