Investing can seem like a very risky, complex and fast-moving process. With endless combinations of investment vehicles to choose from, it can be difficult to take your first step as an investor – especially with the knowledge that all investments carry the risk of losing some or all of your money. So why bother?
Well, there are many compelling reasons to make investing a part of your overall financial plan. Investing can help preserve your wealth by overcoming the effects of inflation, help you save for long-term goals and it can even generate income. So how can you get past all the negatives associated with investing and make it work for you?
A helpful first step is to understand the risks of different types of investments. Watch as Jen learns about stocks, bonds and mutual funds from Mr. Greenback (and find out how she snuck into his office!).
If you’re a visual person, you might also find this Intro to investing infographic helpful.
1. Understand the risks of different types of investments
Stock is capital raised by a corporation through the issuance and distribution of shares through financial markets.
- Less stable
- Higher potential gain
- Risk of company failure
A bond is a debt security – the issuer owes the holders a debt, and is obliged to repay the principal and interest.
- More stable
- Lower potential gain
- Risk of issuer not paying you back
If trading individual stocks and bonds is not your cup of tea, investing in mutual funds is another option to consider.
A mutual fund is a collection of stocks or bonds. Your money is pooled with the money of other investors into a fund that is invested in anywhere from a few dozen to hundreds of different securities.
- Managed by an expert fund manager who reports to a board of directors
- Provides you with professional money management as well as instant diversification
2. Establish your goal timeline
The time horizons of your goals will have an impact on where you put your money. With a shorter time span, a more conservative investment vehicle is typically in order. With a longer horizon, your investment has time to weather more risk.
Here are some examples:
New car fund
Time horizon: 3 years
Potential investment vehicle: Savings account or mutual fund with short-term bonds
Kid’s education fund
Time horizon: 15 years
Potential investment vehicle: Balanced mutual funds
Time horizon: 30 years
Potential investment vehicle: Stock-focused mutual funds
3. Start early, start small and keep going
When you are starting to invest, it is best to start small and take risks only with money that you are prepared to lose. You’ll have two main choices for actually investing your money.
Utilizing the services of a financial advisor at your bank, credit union or specialized investment firm is the traditional way to invest in stocks, bonds and mutual funds.
- Purchases and trades are facilitated through your advisor
- Broker commissions and maintenance fees can be expensive
- Educated professionals are guiding you
- Less time on your part
- Less stressful, as you are relying on a proven coach
- Even though you are relying on expert advice, there are no guarantees
Here are some tips on how to find the right advisor for you.
Direct investing, do-it-yourself investing, self-directed investing – no matter how you describe it, investing on your own is a real option today, thanks to technology.
- Trades are conducted by you through an online discount brokerage
- Typically lower fees and more transparency; you are closer to the process
- Learning and research are totally up to you
- Can be time-consuming
- Your emotions can get the best of you
- Your personal decisions and mistakes can be costly
4. Avoid these first-time investor mistakes
Diving in head first
The basics of investing are quite simple in theory – buy low and sell high. However, don’t be fooled by this overly simplistic view of the financial markets. It is important to study up before jumping in.
Playing penny stocks
At first glance, penny stocks seem like a great idea – with as little as $100, you can get a lot more shares in a penny stock than in a blue chip stock that might cost $50 a share. Unfortunately, what penny stocks offer in potential profitability has to be measured against the volatility that they face.
Going all-in with one investment
Investing 100% of your money in a specific market, whether it’s the stock market, commodity futures, foreign exchange or even bonds, is not a good move. It is better to diversify your risk by putting your dollars into a variety of investment vehicles.
Investing all of your cash reserves
Studies have shown that cash put into the market in bulk, rather than incrementally, has a better overall return; however, this doesn’t mean you should invest all of the money you have. You should always have cash available for emergencies and other opportunities.
Investing based on news is a terrible move for first-time investors. Trying to guess what will be the next revolutionary product or basing a decision on a rumour of earth-shattering earnings is not a recipe for success. Rather than following rumours, the ideal first investments are in companies you understand and have personal experience with.
Remember: all investments made in stocks, bonds and mutual funds carry the risk of losing some or all of your money, even when made through a financial advisor or financial institution.
As always, we recommend that you talk to your financial institution to get more specific advice. You can talk to a financial planner at Vancity about options relating to your specific situation. Not a Vancity member? Join us.
And now a note from our lawyers…