5 Things to Consider Before Investing
There is a huge misconception that you have to have a lot of money to invest or be a professional financial person to invest. That's simply not true! If you can order food on Postmates, you can invest. That's how easy it is. There are a few things to consider though before making any decision as it relates to investing.
1. Know your financial goals
Understanding what you want, why you want it when you want it, and how much it's going to cost is very important. It makes it much easier to save and invest money when you understand what your goals are.
2. Determine your time horizon
Once you establish your goals - set a timeline for each one.
You may be better off stashing your money in a HYSA for short-term goals. If you invest the money you need in the next year or two, you risk the market being down when you go to pull the money out.
For long-term goals (5+ years), you probably want to invest that money so you can take advantage of compound interest (so long as you’re flexible on the timing of when you need to pull that money out).
3. Understand your risk tolerance
Risk tolerance is the level of risk you’re willing to take when investing your money.
Your risk tolerance will not only influence how you allocate your investments in the market and the types of investments you choose, but also your consistency. If your investments feel too risky, you may end up pulling your money altogether causing you to miss out on that compound interest goodness.
4. Diversify your portfolio
The old saying, "Don't put all your eggs in one basket," is especially true in the world of investing.
You want to make sure you’re investing in multiple different types of things (different-sized companies, different sectors, different asset types, etc.). If you put all your money in Apple and Apple goes under tomorrow, you’ll lose everything. Diversification will help reduce the impact of a poor-performing company or a dip in the market.
5. Analyze Costs and Fees
Yes, it’s free to open an account, but there are usually fees associated with buying certain investments. The lower the fee, the better. Fees are one of those sneaky things that can slowly erode our portfolio and significantly impact the growth of our investments over time.
Be sure to research and compare the expenses involved in different investment options. Even something that sounds small, like 1%, can have a huge impact! Look at the graphic below.
Embrace Long-Term Investing
And finally, investing is a marathon, not a sprint.
It's tempting to chase the next hot thing or emotionally react to market fluctuations but resist the urge.
Embracing a long-term perspective is the key to success as an investor! Why? Because the stock market has never not recovered! Don’t believe me? Check out the the chart of the S&P 500 (top 500 companies in the US) below 😎
Wrapping Up
Investing is the ultimate wealth-building tool. Take the time to set clear goals, know your risk tolerance, and educate yourself about different investment options (but not too much time because the best time to start investing is, well, yesterday, and the second best time is today 🤩).
And don’t forget, we’re long-term investors. You got this!
