The decision to start investing is, by all means, a great one. But it only promises success if you take the time to determine which investment strategies will work best for you. Each approach is different depending on the person’s goals, age, income and risk tolerance. If you are saving up for retirement vs. college tuition, for example, your strategy will look entirely different. There are different investments for short and long term results. Once you open your brokage account there in much to consider. Deciding on an investment strategy that works for you will be the key to financial success.
Here is what you should know about building your investment strategy:
Allocating Your Investments
Moneyweb says the most difficult question at this point is how much are you willing to invest, and where?
Equities, bonds, and cash are the basic choices while learning the ropes of your chosen investment strategy. This means after opening a brokerage account the first step, will be to allocate your money to one of those options. For most people, a ratio of 60:40 works well as a starting point. This rate translates to having 60 percent in equities, and the remaining 40 percent mostly in bonds (and some cash).
Age is a significant factor is determining your asset allocation. When you will need the funds is even a bigger factor. If your goals are to invest now for a return you can use in 3-5 years; you would have a different approach than if you were investing for retirement 20 to 30 years away.
Wells Fargo list these as the most common investment types:
- Bond: Essentially a loan that you are giving to the government or an institution in exchange for a pre-set interest rate regularly paid for a specified term. It pays interest (a coupon payment) while it’s active and expires on a specific date.
- Stock (equities): A type of investment that gives you partial ownership of a publicly traded company.
- Mutual fund: An investment vehicle that allows you to invest your money in a professionally-managed portfolio of assets that, depending on the particular fund, could contain a variety of stocks, bonds, market-related indexes, and other investment opportunities.
- Money market account: A type of savings account that offers a competitive rate of interest in exchange for larger-than-normal deposits.
- Exchange-Traded Fund (ETF): ETFs are funds that trade like stocks on an exchange. When you purchase an ETF, you are buying shares of the overall fund rather than actual shares of the individual underlying investments.
Choose Your Equities and Bonds Wisely
Investing in equities can be risky, so you must pay attention to market trends and analyses.
Most brokerage sites have a list of top performers that have shown good returns, but even these have no guarantees. When managing your investment account, choose highly ranked companies in the performance indexes.
The key is to diversify your investments! Not just within each category of investments but also the sector. Since the economic condition can quickly affect the market, it is not wise to keep all your money in one industry. Think about all areas, tech, financials, infrastructure, retail, etc. Then decide how much risk you want to take on within your individual stock choices.
Mutual Fund Safety
Mutual funds are often one of the biggest tools in retirement saving. Since it allows you to easily tailor your investment strategy based on age, investment sector, and overall risk. When investing in mutual funds, generally it is more about the type of fund you are investing in as opposed to the individual stock picks.
Fund managers often pick stocks or commodities for the fund based on past returns. The high performing bundle of stocks within the fund allow investors to offset their losses on any underperforming companies. Overall deemed relatively safe, mutual funds can be a stable choice to add to your portfolio.
Consider an Exchange Traded Fund
As a newbie, you might want to invest in an exchange traded fund (ETF).
An ETF is a collection of stocks that are traded close to the net value of all included assets. This instrument lets you follow, for example, a group of companies in an entire industry rather than having to trade individual stocks. Investing via an ETF is relatively low-maintenance because those funds use a stock index to inform the transactions in the course of the trading day. ETFs can also be used to invest in bonds. ETFs tend to be safer and much less volatile than individual stocks, which consequently offer both a potential for higher gains and higher losses.
Don’t Forget Money Markets
Investing in money markets is generally quite safe, but this investment strategy also comes with rather low returns. Consider it like a high yield saving account for the funds that aren’t tied into investments. This is an excellent haven that you will want to keep in your back pocket when choosing investment strategies.
When opening a brokerage account, you will want to have an idea of what to expect regarding the returns, how much to invest, and how risk-averse you are. There’s also the time element: Successful investment strategies are built on knowledge and experience. It is always important to seek more information to help you understand the intricacies of the markets as you grow your investments.