Top 7 Checkboxes for Investing

The world of investments and associated risks may seem a scary proposition for novice investors starting an investment portfolio. However, this need not be the case as prudent preparation, a sense of discipline, and a good understanding of individual risk appetite will build a good foundation for any investment endeavours you are looking to undertake.

Before creating a solid investment portfolio, here are some helpful tips to consider:

1. Start Early, Or Start Now!

In your 20s or early 30s, the biggest asset you have is time. For nearly every type of investment, including retirement savings, nothing compares to the benefits of the effects of compound interest.

On the flipside, any potential investment losses can be overcome in time as well. Having said that, “it’s too late for me to start investing” is not a good excuse to keep your money in a bank savings account. It’s still better to start late than never, as long as beginner investors are not tempted into taking unnecessarily high risks to make up for perceived “lost time”.

2. Quickly and Together

Before commencing an investment journey, ensure that existing high interest debts are settled. A common culprit is credit card debt; a high interest rate means outstanding amounts balloon in a short period of time and can negate any profits made through investments.

There is no investment strategy that pays off as well as, or with less risk than merely paying off all high interest debt that you are holding on to. Regardless of market conditions, any high interest loans should be settled as quickly as possible before considering embarking on investments.

Along the way, you may hear all kinds of stories and opinions from your friends. For example, you hear many people talking about a particular asset, your friends are buying this asset, and then you can’t help but invest in it because you too think that it is a huge opportunity to make money too. Do remember to weigh the pros and cons and do your homework before making a big decision!

3. Set Your Goals

Now that the groundwork is complete and you are ready to start investing, identify your motivations and goals.

What are you investing for? What is the purpose? What are your goals and objectives?

Starting at the end-game and identifying your goals will place you in good stead to organise your investment portfolio depending on the timeframe of the varying asset classes. Once you have your goal identified - saving for a home, for your kids’ education, a vacation, or retirement - the time horizon will become clear and you’ll be able to figure out how to invest your money.

4. Evaluate Your Comfort Zone in Taking on Risk

All investments involve a certain degree of risk. If you intend to purchase securities, such as stocks, bonds or mutual funds, it is important to understand before commencing investments that you could lose some or all of your money.

You can determine your risk appetite by looking at two factors: Time Horizon and Bankroll.   

Your individual time horizon represents the amount of time you can keep your money invested. For example, with a relatively short time horizon, you may be forced to sell your securities at a significant loss. With a longer time horizon, investors have more time to recoup possible losses, and are therefore theoretically more tolerant of higher risk.

Determining how much money you can stand to lose is another important factor to consider when working out your risk appetite. While this may not be the most optimistic method of investing, it is the most realistic approach to adopt before commencing investments. By only investing money that you can afford to lose, you will not be pressurised to sell off or liquidate investments before the recommended time period because of panic or an urgent need for funds.

5. Diversify

By investing in a variety of asset categories with varying returns pegged to different market conditions, an investor can put together a portfolio that is protected against significant losses.

Historically, the returns of the three major asset categories - stocks, bonds and cash - do not move up and down at the same time. Market conditions that cause one category to do well often cause another asset category to produce average or poor returns.

As such, if one asset category experiences a decline in returns, you will be in a good position to counteract losses with better investment returns from another asset category.

By investing in more than one asset category, you will reduce the risk of losing money and your portfolio’s overall investment returns will be relatively well-balanced overall.

In addition to this balancing out factor, careful asset allocation is important because it has a major impact on whether you will meet your financial goals. A portfolio without sufficient risk may not earn a large enough return to meet your goals. As such, identifying your risk appetite and well thought-out asset allocation are key steps in starting an investment portfolio.

6.  Consider Rebalancing Portfolio Occasionally

Once you have put together an investment portfolio and are happy with the current asset allocation, the first step has been accomplished. However, this will not remain indefinitely, as your investments are subject to market fluctuations and your changing needs as you grow and experience different phases in your life.

As your money grow and you get closer to the end of your time horizon, you may find that your original portfolio no longer suits your needs. Adjusting it to fit your current situation and changed risk appetite is called rebalancing.

By rebalancing, you will ensure that your portfolio does not overemphasise one or more asset categories, and you will return your portfolio to a comfortable level of risk.

You can either rebalance based on the calendar or on the progress and performance of your investments. Many financial experts recommend that investors rebalance their portfolios on a regular time interval, such as every six or twelve months. Others recommend rebalancing only when the relative weight of a particular asset class increases or decreases more than a certain percentage you have identified in advance.

The advantage of the latter method is that your investments tell you when to rebalance, keeping your portfolio on its toes and well-balanced to ride out difficult market conditions.

7. Keep Taxes in Mind

In line with the previous point, diversification is key to building a solid investment portfolio. With that, investors should be careful not to invest too heavily in shares of their employer’s stock or any individual stock linked to the company. With that, be aware of your taxes too!

Let’s say, if you have a certain profit goal or target you have in mind for your investment, you need to take your costs into consideration – commission is one thing but many overlook taxes. It could even make or break your investment decision.

Many people invest thinking it’s a great plan, until they start exiting their assets then they will realise that the investment scheme was not was they initially thought it was. It’s not easy. But it’s definitely worth doing the research and being aware of taxes while you are making important decisions related to your finances.

These tips will come in handy for anyone seeking to start an investment portfolio, but should not be taken as a guaranteed manual for investment success. In addition to these foundation tips, check out this article for some critical details that most millennial investors tend to neglect in the pursuit of investment success.

Congratulations, and we wish you the best of luck on your path to financial freedom!