When you decide that it’s time to start investing, sometimes the hardest part can be knowing where to start. For beginners, taking that initial plunge into the market can seem intimidating. But it doesn’t have to be. You can get the ball rolling by answering just a few simple questions – like the ones below.
And even after you’ve earned your stripes as an experienced investor, it might serve you well to revisit these basic questions every once in a while.
1. What are my long-term investment goals?
If you’re new to investing, a good first step can also be an easy one. Take some time to think about your big-picture goal. Not necessarily the dollar amount you’re looking to gain, but the real motive behind investing. Why do you want to invest?
Are you looking to build funds for a new home, an education for yourself or your child, or for a more comfortable, sooner-rather-than-later, retirement?
The answer can be a combination of goals, but your reasons should be obvious and tangible to you. Thinking about what motivates you should help you better understand what your investment strategy should be. Plus, having a clear vision of what you hope to achieve in the end can help you stay committed throughout the ups and downs of the market.
2. What’s my target return?
Once your end goals are defined, you can start playing with the numbers and estimate the amount you might need in returns. Ideally you’re planning for years into the future here, so keep in mind that financial goal posts tend to move as years pass.
In other words, we can’t scientifically predict the exact cost of the down payment on your future home, or the cost of your child’s future college education. Nor can we predict how the market will behave in the future.
There are a lot of variables involved, so keep this number realistic, but flexible. Think of this figure as a starting estimate, which can be adjusted as you start to see return on your investments and make progress towards your goals.
3. What does my investment timeline look like?
When it comes to investing, typically the more time you have the play with, the better your odds are at finding success without having to risk too much. Not all goals will need a deadline, but some might come with time constraints.
For example, if you’re in your 20’s and looking to build funds for a comfortable retirement, it might not make sense to impose a deadline at this point. But, if you just had a baby and are planning ahead for their education, you can get a rough idea of when those funds might come in handy.
Ask yourself how much time you have to reach your specific money goals. If the answer is anything less than a few years, but your target return is on the high side, then it’s time to talk about risk.
4. What’s my risk appetite?
In order to achieve your target return amount within a certain timeframe, you might need to take on a certain amount of risk. Generally speaking, the more time you can allow yourself, the more you can avoid taking on risk.
We each tend to have an inherent risk appetite that could be influenced by age, experience, financial situation, and even gender. But, you can override your risk tendencies by acknowledging your risk appetite and planning your investments carefully or working with an advisor.
5. What are my resources for successful investing?
As we mentioned earlier, time is one of the most critical resources that can benefit your investments. Ideally, you can build in plenty of time – years and years – for your investing strategy to fully develop.
Start slow and educate yourself as you go. Take this time to continue your financial education. This way, as you build wealth, you can become more equipped to make savvy investments with that capital.
You’re bound to learn from the investments you make, but it can also be a good idea to supplement your experience with other resources as well. We have plenty of educational articles which you can explore here in the Do It Right Community to get started. There are also plenty of podcasts, books, and even investing games that can help you build some skills.
If you’re looking to start investing for the first time, or build your portfolio, what decisions do you find to be the most challenging? Or, what resources have you employed to guide your strategy? Share your thoughts in the comments below!