Most investors face a constant dilemma when they think about investing in equities. One of the primary questions in their minds is – How do I start my financial journey? Am I ready to start investing?
A straightforward answer to this question is that start your financial journey today since there is no ideal time to start investing. As Warren Buffett says, “Investing is about TIME in the market and not TIMING the market.”. But one thing that people can do before starting their investment journey is to prepare well. In this article, we will go over 5 steps one can take before they start investing to make the process much easier.
Draw a personal financial journey roadmap
Before you make any investments of any sort, sit down and take an honest look at your entire financial situation — especially if you’ve never made a financial plan before.
The first step to successful investing and capital gains is figuring out your goals, either on your own or with the help of your family. Once this goal is set, investment plans can be designed to specifically meet these goals as soon as possible. There is no guarantee that you’ll make money from your investments. But if you understand how investing works and follow through with a well-designed plan made by either you or your financial advisor, you should be able to gain financial security over the years and enjoy the benefits of good investing.
Understand your comfort zone
Any form of investment carries risks. In fact, investment risks somewhat tend to be directly proportional to their potential returns. Hence, higher risks imply higher potential returns and vice versa. While every investor desires to earn high returns, taking high risks might not be suitable for all of them. If you invest in an instrument that has a higher risk than what you are comfortable with, then you might make rash decisions and suffer losses.
On the other hand, if you invest in instruments with much lower risks than your tolerance levels, then you might not be satisfied with the return and might not be able to meet your financial goals. Therefore, it is important to understand your risk tolerance levels and tie them with your return expectations to create an investment strategy to meet your financial goals at a suitable time.
Learn, Learn and Learn
The most important thing one needs to do before making an investment of any sort is to learn how it works and gain a deep understanding of it. You must spend some time understanding investments, markets, factors that affect prices, things that you need to know to analyze a company, etc. Insufficient knowledge of investment opportunities can cause a person to make uninformed decisions that can cause huge losses. By learning how investments work, one can make better decisions and stay informed of how their portfolio is doing. You will make mistakes but learn from them and don’t make the same mistake twice.
Staying in touch with the news, reading financial books and understanding yourself and the reason why want to invest are a few ways that can help you make informed decisions.
Understand your time horizon
A very important aspect that you need to identify is the time in which you intend to stay invested. This will depend upon 2 factors: your financial goal and your risk appetite. For example, If you are investing to build a retirement corpus for yourself, then your investment period would be longer than investing in buying a house. This is essential since different types of investments can have different investment period requirements and growth rates. One should ideally stay invested, till their goals are met.
Investments are generally broken down into two main categories: Risky and less risky. The longer the time horizon, the more aggressive, or riskier, a portfolio an investor can build. The shorter the time horizon, the more conservative, or less risky, the portfolio the investor may want to adopt. This is because equity markets are generally volatile in the short term and there is a possibility that you can get caught in a bear market thereby causing interim losses to your portfolio.
Create a well-diversified investment plan
By including asset categories with investment returns that can either move up or down pertaining to different market conditions within a portfolio, an investor can help protect against significant losses. Historically speaking, the returns of the three major asset categories – stocks, bonds, and cash – have not moved up and down at the same time at any given point. Market conditions that can cause one asset category to do well often cause another asset category to have average or poor returns.
By investing in more than one asset category, you’ll reduce the risk of losing your money and your portfolio’s overall investment returns will have a smoother and gradual rise. If one asset category’s investment return falls, you’ll be in a position to counteract your losses in that asset category with better investment returns in another asset category which can help you stay in the green. For e.g. It is often seen that international markets like the U.S., and Europe are lowly correlated with the Indian equity markets and hence a small allocation to overseas investments can greatly help in diversification.
In addition, asset allocation is important because it plays a major role in whether you will meet your financial goal. If you don’t include enough risk in your portfolio, your investments may not earn a large enough return to meet your financial goal. For example, if you are saving for a long-term goal, such as retirement, most financial experts agree that you will likely need to include at least some stock or stock mutual funds in your portfolio for a good return on investment.
