As a beginner investor it’s sometimes difficult to determine where usually start, or what investments you should start with. Should you start with stocks or bonds, or should you open an IRA or possibly purchase an annuity?
One thing you definitely need to keep in mind is that every investment you make comes with a certain degree of risk. For example, most securities aren’t insured by the federal government. If they fail, you lose your money, even if you purchased them through your bank or credit union.
Below are a number of the most important questions that you need to ask, and answer, before you begin investing.
Question 1: Why are you investing your money?
Are you investing because you want to save up the money you need to purchase a house? Maybe for your retirement or to pay for your son or daughters education? This is an important question to ask before you begin because it will lead you towards different investing options.
Question 2: What is the timeline between investing and getting your money back?
If you invest in stocks, bonds or mutual funds, you can sell them at any time you wish, although it’s not guaranteed that you’ll get back all of the money that you paid when you purchased them. Other investment options limit you as far as when you can sell them. Point being, if you need your money back right away, or if you don’t need it for years and can let it accrue interest and revenues, your investing decisions will be different.
Question 3: How much risk are you willing to take with your money?
As we said at the beginning of this blog, every investment comes with a certain degree of risk. A high-risk investment usually has a higher reward, and vice versa. For example, a savings account at a bank is protected by the US treasury. It’s very unlikely that you’ll lose your money if it’s in a bank account, but it’s also very unlikely that you’ll make any money with your money. In fact, most banks don’t pay enough interest to keep up with inflation. Bonds are a bit more risky but still relatively safe while other investment options like stocks pay-out much better but have the highest risk.
Question 4: Is your portfolio diversified?
Diversification is one of the most important facets of investing. If your investments/portfolio are well diversified you’ll be much safer during and economic downturn or if one or two of your stocks or other investments fails, because the others will still be going strong.