A Beginner’s Guide to Turning Investment into Wealth

The general definition of investment means to commit resources in order to achieve benefits later. Financially speaking, investment is the process of devoting money to achieve a financial return later on. Investing is a suitable means of earning money and attaining your goals.

Investing, although beneficial, is also quite risky. It is different from saving or trading money. When a person invests, they are putting away their money for long periods of time. Unlike savings, there’s no guarantee of a profitable financial return when it comes to investments. Furthermore, people invest for a number of reasons; for retirement, education, to build their wealth, to buy a house, etc.

Investing can seem pretty intimidating, especially for beginners, but it’s really not all that complicated. Anyone can invest if they want, even you! In the US, investing is so popular that the US as a whole makes up 60% of the world’s stock market. Here’s a simple guide to investing for newbies!

Conversation of Investment into Wealth

Setting Financial Goals

Identify your investment

Before diving right into investing, you have to set firm goals. What do you want to achieve through investing? A down payment for a house in 3 years? Retirement plan? A business?

By narrowing down your goals, you can allocate your resources and decide how much you want to invest and through which method. This makes the process simple. By comprehending your objectives and the process, you can determine the associated risks far better and be able to sufficiently categorize your investing accounts.

For example, if you’re investing with the idea that you must pay for your child’s college education in about 10-15 years, you can consider future college expenses, inflation, and other estimated investment returns. Retirement accounts is also an option to think about. Research by Saxo showed how just 29% of the young generation investors have a retirement account.

Short and Long-Term Goals

It’s essential to understand the timeline of your investment goals since it prominently affects your investment strategy. Investment goals can either be short-term or long-term. Short-term goals usually have a time range of 1-3 years, and investments for such timeframes generally have conservative approaches.

In contrast, long-term goals can last 7 years or even as long as decades. With long-term goals, however, you can take higher-risk investment approaches.  It is estimated that investing for 1-year results in a positive, profitable return about 72.8% of the time. Meanwhile, long-term investments, for instance, 10  years, conjured a positive return 94.2% of the time.

SMART Goals:

A study found that those who have goal-driven actions and actually write down their goals, are successful 76% of the time as compared to those who do not follow this method. This marks the introduction of SMART goals. An effective approach to setting investment goals is the SMART system:

• Specific
• Measurable
• Achievable
• Relevant
• Time-bound

This is a holistic approach that takes into account all the factors that can help you set the ideal clear, realistic goals. This approach states that one should start by specifying what they want to achieve, then measure and track their progress.

Make sure their goal is achievable and realistic as per their situation based on their finances, income, and resources. Following this is considering which goals are relevant and important for them, and lastly, they are to determine a specific time for their goals in order to see which goals are urgent and should be prioritized.

Following this framework is a practical way of starting to invest since it helps make your journey more clear.

Understanding Risk and Reward

Risk and Return Relationship

Before investing, it’s important to understand the principles of investment, starting with the relationship between risks and returns.

If an investment has a potentially high risk of losing money, the chances of getting profitable returns are just as high– and vice versa. In general, there’s usually a 10% to 30% chance for an actual return as compared to the expected return.

Risk Tolerance Assessment

This assessment basically helps you evaluate whether or not you can handle the risks that may come with investing. This is done by analyzing your financial status, investment goals, time span, and even your emotional stability.

First, evaluate your financial status. How much can you invest? What is your budget? Your income, savings, expenses, and debts should all be assessed to make a critical decision on what investment plan would be most suitable for you.

If you can afford it, then high-risk investment plans are possible since this indicates higher tolerance for risk– and vice versa. Secondly, we’ve already established that investment goals are an important consideration. Decide whether your goals are long-term or short-term.

Long-term goals imply that you possess high-risk tolerance so high-risk investments can be made. In addition to this, you have to take into account how long you plan to invest. If you intend to invest for long periods of time, then you’re open to higher risk tolerance. It’s advised that in high-risk plans, you should invest as much as 10% of our total net assets and not more than that. Lastly, it’s very important to check your emotional stability. Investment plans come with a lot of risks, and fluctuations in the market.

You have to be mentally prepared for such stuff. If you’re confident that you can handle these complications, then that implies you have a high-risk tolerance.

5 Vehicles of Investment

The following are the 5 vehicles of investment:

Stocks

Stocks, or equities, refer to the shares in company ownership, which include a claim on the said company’s earnings and assets. Therefore, stockholders are people who own shares and hence have partial ownership in that company or corporation. How much earnings or assets a company stockholders gain depends on how many shares or stocks they have. The average stock market has a success rate of 14%-33%.

Many individual investors buy stocks and are involved in buying and selling stock exchanges to build their wealth. For long-term plans, stocks are beneficial because they offer higher returns, and income is received as dividends. Among young investors, stocks have been a popular option for approximately 39% of them.

Stock values are also known to increase over time. However, the downside of investing in stocks is that they are pretty volatile and risky. Stock prices fluctuate

Bonds

Bonds are relatively safe vehicles of investment because they are government-based. They are debt securities with fixed rates that investors loan to corporate or government borrowers. Platforms like corporations, governments, and states use bonds to fund operations and strategies.

The benefits of bonds are that during periods of inflation, they have high-interest rates, so they protect investors from inflation, and they also have low risks. Bons are the preferred choice for 9% of US citizens. In 2018, the average rate of return on investing in bodies was about 6.1%.

1. However, the rates of bonds vary pretty often, they have a ‘lockup’ period, and if withdrawn early, they come with a penalty. Plus, how much you invest in bonds is limited.

Mutual Funds

Mutual funds are quite a popular option. In just the US, over 50% of people have possessed at least one, if not more, of mutual funds in 2022. Through mutual funds, shareholders merge their investments to invest in stocks, bonds, etc. Funds from various industries and multiple classes of assets are covered through this investment instrument, and what is more, is that professional investment portfolio managers supervise everything to aid the investors in building their wealth and gaining capital.

The advantages of mutual funds include; dividend reinvestments, reduced risks, and advanced portfolio management. Some disadvantages include; high sales charges and expenses, inefficiencies regarding taxes, and possibly ill-intentioned management. 

Real Estate

Real estate is a growing market. In fact, by 2031 its market size is predicted to be as high as $30575.5 billion. Real estate is a popular option even among young investors being that about 37% of them are interested in this. Like stocks, Real Estate Investment Trusts (REITs) can be negotiated on stock exchanges. In REITs, numerous investors who do not wish to deal with property management merge their funds to profit from income generated by real estate investments without having to deal with the affairs of real estate themselves. Through this medium of investment, investors gain certain tax benefits, they have leverage and a steady cash flow, and it proves to be quite profitable over time. However, it is capital-intensive, there may be management issues, it takes significant time to bear fruit, and it can be a costly investment since transactional costs may be high.

Real estate investment is relatively popular. A study was conducted which showed that over 89% of US investors consider investing in real estate.

Exchange-traded funds (ETFs)

Similar to mutual funds, ETFs also involve a merger of investment securities. They are a popular alternative to mutual funds. ETFs, generally tracked on specific indexes, are traded on exchanges. When individuals invest in ETFs, they receive assets they can buy or sell during market hours. ETFs are managed actively, have relatively low expense ratios, lower risks, are quite tax-efficient, and offer dividend reinvestments. ETFs have an average return rate of 10.35%, according to Dalbar’s research. However, they lack liquidity, risks are hidden initially, and they lack diversification.

4 Common Mistakes to Avoid While Investing

Following Popular Tips and Trends

A common mistake beginner investors make is following popular trends and tips. Sure, it’s usual to be influenced by the chances of making money quickly, but following other people’s footsteps or giving in to rumors can be risky.

Market prices are rapidly influenced even before a trend becomes widely popular, so it’s always better to do your research, analyze your resources, measure the risks, and then invest carefully. 

Timing the Market

You never know when the perfect time will be for buying or selling investments in the market. Making such a prediction solely based on short-term prices is a common mistake, even for experts who have significant experience in investing. You have to know the market trends to predict the best market time. For example, a bear market is, generally, the ideal time for stock markets 78% of the time. Therefore, it’s more appropriate and safer to take on a long-term approach rather than a short-term one to reduce risks and have greater chances of higher returns in the future.

Diversifying

Diversification in investment means the strategy of spreading your investments in order to ensure that your exposure to a single type of asset is limited. This strategy reduces the volatility and risks of your portfolio and is highly recommended, especially for beginners. An ideal and widely common diversified portfolio would consist of 60% investment in stocks and a 40% investment in bonds.

Diversifying increases your chances of steady cash flow and acts as a safety net. Therefore, the lack of diversification can be pretty consequential, so be mindful!

Overlooking Fees and Expenses

Often, investors fail to realize the influence of fees and expenses and only realize their mistake when it’s too late, and their investment returns are ruined. Investment mediums like ETFs, mutual funds, etc., have fees associated with them. In fact, 51% of new investors don’t quite understand how investment fees work.

It is important to understand the significance of these fees. Beginner investors should take into account the transaction costs, expense ratios, and other such expenses before property investing. Looking into such factors also helps investors decide on less costly options to help reduce expenditures.

Steps to Take to Get Started in Investing

Opening an Investment Account

The first step to getting started with investments is opening an account for investment. This comes down to what type of investment you’re getting involved in and what your ultimate goal is. If you’re investing in a retirement plan or 401k investment account, there are individual retirement accounts (IRAs), 401ks, or Roth IRAs.

592 plans are common and popular accounts for educational saving purposes. If you plan on collaborating with a brokerage firm for your investments, then you can open individual brokerage accounts as well. Naturally, you’ll need to cooperate with financial associations for your investment, so it’s best to research well-reputed banks, brokerage firms, etc., before investing. Likewise, it’s vital to have all your necessary documents ready to start investing. This includes financial records, residential information, employment details, etc.

After you have all the required documents and set your mind on your desired goal and account, you need to fill out the essential forms to get started officially.

Selecting a Brokerage

The next step is selecting a suitable brokerage for which you need to decide on what type of investment you wish to make, be it stocks, mutual funds, bonds, real estate, etc. Once you have completed this step, you can move on to selecting a brokerage firm by investigating the ideal firm based on factors such as resources, reputation, fees, etc. Brokerage accounts are widely used with the US having more than 63 million.

After finalizing a firm, you can finally open an account and start investing!

Conclusion

Conclusively, investing is a useful method of building your wealth for the future. Although a lengthy process, it’s not complicated if you take it slow and steady. Inherently, there are a lot of factors to take into account before starting, such as your financial status, ultimate goals, what type of investment, where to invest, and how. It is a thorough process, and beginners are advised to start with a small investment initially.

FAQs

What are the different forms of investment?

You can carry out investments through a variety of forms or instruments, such as stocks, bonds, ETFs, and mutual funds.

Why should you invest?

Investment is a good option for future safety, income, and capital gain. If you wish to achieve a comfortable retirement or be able to fund your children’s education in the future, or anything of the sort, then investing can help you accomplish such goals.

Which assets come in handy during times of high inflation?

Government bonds, commodities, and real estate are reliable assets of investment if you want to reduce the risk for periods of high inflation.

What are dividends?

Dividends are rewards. They can be in cash or otherwise that a company awards to its shareholders. It refers to the distribution of profits among a company’s shareholders.

What are penny stocks?

Shares in companies that come in at a pretty low price and also have a low volume of trade are referred to as penny stocks.