Are you a newbie to investing? If you want to become a successful investor, the best time to educate yourself about the markets is right now, before you get started. The truth is that you aren't going to get rich overnight through investing. Experienced investors know that it takes time and patience to build wealth. Financial advisors frequently suggest that learning first is exactly the right thing to do.
Here are four of the most important concepts that you should know about as you prepare to invest:
Risk vs. Return
The first step in the investment process is to determine the Return on Investment (ROI) that you are seeking. Then you need to consider the amount of risk you are willing to take. Your risk level is correlated to the size of the ROI that you receive. Before you take on a higher level of uncertainty, you must have a reasonable chance of a higher return. For example, an investment that can double your money in a month is risky because the chance is good that you could lose all your money just as quickly.
Because risk levels are affected by many market factors, it is recommended that you consult professionals for ideas and recommendations for your investment portfolios. Your trusted financial professional can help you determine your risk tolerance.
One strategy for minimizing risk is to select assets from across the asset classes: stocks, bonds, and mutual funds. It's a way to ensure that if one of these groups takes a drastic downturn, your other investments will protect you from across the board significant losses. It is recommended to allocate through at least five types of classes.
Diversification is similar to asset allocation but is applied to the asset class. For example, diversification within the asset class of stocks would be to buy 15 or 20 different stocks. The purpose is similar to asset allocation - to minimize risk and to make sure that if something tanks, it doesn't take your entire portfolio down with it.
Once you understand the basic concepts you can keep tabs on how your assets are performing:
- Examine your trading records to see that all of the trades went through at the prices that you instructed and with the correct commissions.
- Keep a good paper trail of all the transactions that occur in your portfolio just in case you ever need to contest anything.
- Make sure that the investments that you own are in line with your current investment strategy. Your strategy may change over time. Be sure to compare your investments to your current situation.
If you aren't satisfied - if they seem to be underperforming - talk with your financial advisor about making changes to your portfolio. With a commitment to learning the basics and the help of a financial advisor, you don’t have to be a financial genius to be a successful investor.
Charles P Myrick CPA offers tax preparation for individuals using a process that combines smart, personalized planning with annual tax preparation and filing. Our job is to help you know about all the available tax opportunities that meet your individual needs and circumstances. We work closely with tax lawyers, and investment advisors to ensure that all the details are legally sound, technically accurate, and working to your maximum benefit. Contact us to learn more: (202) 789-8898