Imagine this!
Your Aunt Jane gave you $100 for your birthday and you are thinking of investing the money in the stock market but you're not sure where to start.
I was in exact same situation a few years ago and it prompted me to begin learning about investing.
As someone, who started her investment journey in their early thirties, looking back, there are a few things I wish I'd known before taking the plunge.
Did you know?
September is usually the poorest performing month in the stock market, often blamed on the vacations that investors take in the summer months, which decrease trading.
1. Start early
I wish I had known just how powerful starting early could be. If I had started investing in my early twenties, my investment would have grown significantly more due to the magic of compounding.
Photo by Sasun Bughdaryan on UnsplashLet me quickly explain what compounding is. If you start with, let's say, $500 and invest it in something that earns you extra money, like a savings account, you might earn $10 in the first year.
In the second year, you could potentially earn money not just on your initial $500 but also on the extra $10 you earned in the first year, so now you have $520.
This process continues year after year!
Photo by Towfiqu barbhuiya on UnsplashQuiz
What happens with your money with compounding growth?
Did you know?
"The longer money compounds, the faster it grows. Money growing at 6% per year will double in about 12 years, but it will be worth four times more as much in 24 years!"
2. Do your research
In my early experiences, I used to make investment choices based on recommendations from friends and what I saw on social media.
However, I've learned that it's wiser to invest in companies operating in industries you have a good grasp of. By taking the time to educate yourself about the company and industry trends, you can reduce the risk of encountering financial setbacks.
Quiz
Why is it advisable to invest in companies that operate in industries you have a decent understanding of?
3. Diversify your investments
As a first time investor, I didn't have a full grasp of the concept of diversification. Initially, I invested heavily in one stock and when the value dropped I suffered significant losses.
Diversification is a great way to reduce risk. By spreading your investment across several industries you're less likely to lose all your investment in case of a negative event.
Technology, pharmaceutical, manufacturing, and healthcare are some of the industries to consider when deciding where to park your money.
Did you know?
"Portfolios can be over-diversified. For example, if you add a new type of shares to your portfolio that's too similar to what you already own, you could suddenly change your overall risk profile — either exposing you to too much risk, or lowering your growth potential."
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4. Stay patient and adapt
I used to think that investing was a set-and-forget activity. However, that's not the case.
Periodically, you should review your portfolio and adjust it to align with your changing financial goals and comfort level with taking chances.
Avoid making impulsive decisions and be patient during market fluctuations. The time you invested in the market is more important than investment timing.
Did you know?
"The stock market got the names 'bear and bull' because of caballeros (Spanish knights) in California. The caballeros put California grizzlies in battle with bulls. They observed bears swiped downward and bulls hooked upward, thus lending the analogy."
Take Action
Photo by Bermix Studio on UnsplashMaking smart investment decisions often comes with both success and learning experiences.
Just like I initially lost some of my investment and later recovered it, these experiences can provide valuable lessons that will ultimately make you a wiser and more resilient investor.
By following these steps, you'll not only learn how to make informed investment choices, but you'll also gain valuable experience that will help you build a financially secure future.
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