If you are new to the world of stocks, bonds and other financial instruments, you should know that investment is both an art and science. Only after you understand how the financial market works should you start making your investment plans. Here are a few things you should think about if you are keen to invest your money.
Understand Your Risk Appetite
You must not only be open to the risk of losing money but also decide exactly how much you can afford to lose. You should realize that every investment carries some inherent risk of loss and that some investments carry higher risk than others.
As a novice investor, you should avoid investment in individual stocks. Stocks carry an extremely high risk and need an in-depth knowledge of the market. A safer option would be investment in a diversified mutual fund. In this case, a fund manager invests your money in various financial instruments, reducing the risk of losses through diversification. There are many excellent mutual funds that carry no entry load. Be patient, looking for long term gains as opposed to quick returns.
Get an idea about different money market instruments, available investment choices and the risks associated with them. Read articles and books on related topics, attend seminars or talk to experienced investors.
You will find a huge amount of investment information on the internet but steer clear of the ‘get rich overnight’ investment options advocated by a few so called investment gurus.
You have the option of making these investments on your own or hiring an investment manager to do the job. Engaging the services of a personal investment manager is fine as long as you can afford to pay the manager’s fees and other charges. Ask relatives and friends for references before you hire an investment manager.
If you choose to manage the process on your own, proceed cautiously and slowly. Start off by investing a small amount- this way even if you do make losses, they will be minimal. With experience and learning from your mistakes, you will be able to make better investment decisions.
Consider investing over half the earmarked amount in short-term bond funds. Invest the remaining amount in one or two conservative equity funds with no entry loads.
As time goes by and you become more knowledgeable on investment, you may want to reallocate your assets and diversify your investments depending on your changing goals, risk appetite as well as tax situation. Do so gradually, with care and patience.