How to invest: mastering wealth for beginners is crucial before getting into some of the more difficult topics, such as Active and Passive investing.
Investing often appears daunting, shrouded in complex jargon and mystifying terms. A quick online search inundates you with a deluge of information, from fund selection to stock market volatility, leaving you wondering where to even begin. Amidst tales of overnight Bitcoin millionaires, the fundamentals of investing can feel obscured.
So, let’s cut through the noise and delve into the essence of investing. In this post, we’ll strip away the layers of complexity and explore the fundamental principles that underpin investment decisions. The basics remain refreshingly straightforward.
What is Investing?
At its core, investing involves putting your money into something with the expectation of making more money, or generating income. It’s about planting the seeds today with the hope of reaping a more abundant harvest tomorrow.
Where to Begin?
It’s important to start with what you can invest in. Let’s focus on the bedrock of investing: assets.
Assets
An asset is essentially anything of value that you own or control. It can range from tangible possessions like your home to intangible financial instruments like stocks and bonds. Assets serve as the foundation upon which investment portfolios are constructed.
Tangible Assets
- Property: Your home is a typical example of a tangible asset. Whether it’s a residential or a commercial property, real estate holds intrinsic value and can increase over time. Beyond the potential for capital appreciation, rental properties generate ongoing income through tenant leases, providing a steady stream of cash flow.
Financial Assets
- Shares/Stocks/Equities: When you invest in stocks, you’re essentially buying ownership in a company. Each share represents a fractional ownership interest, entitling you to a portion of the company’s profits and assets. As the company grows and prospers, the value of your shares increase, translating into capital gains for investors.
- Of course, this could also go the other way, and the value of your shares decrease.
- Bonds: Bonds are like loans, issued governments, or companies to raise capital. When you purchase a bond, you’re effectively lending money to the government/company in exchange for and interest payment, known as a coupon. The Bond has an end date (maturity), where the government/company pay your back the money you loaned.
- The interest provides investors with a fixed-income stream. Bond prices can also change, for example, when new bonds offer better interest payments.
Commodities
- Raw Materials: Commodities encompass a broad spectrum of raw materials and natural resources, ranging from precious metals like gold and silver to agricultural products like wheat and coffee. Investors buy commodities to capitalise on price fluctuations driven supply and demand. For instance, gold serves as a hedge against inflation and economic uncertainty, while oil prices fluctuate in response to geopolitical tensions and global demand.
Supply and Demand
Supply and demand represent the fundamental forces driving markets. Supply refers to the quantity of goods or services available for consumption, while demand represents the desire or willingness of consumers to purchase those goods or services.
Supply
Supply is determined factors such as production capacity, input costs, technology, and government regulations. It represents the quantity of a product that producers are willing and able to offer for sale at various price levels. As production increases, supply expands.
Demand
Demand, on the other hand, is influenced factors such as consumer preferences, income levels, prices of related goods, and overall economic conditions. It reflects the quantity of a product that consumers are willing and able to purchase at different price points. Typically, demand decreases as prices rise.
Price Determination
Supply and demand determine the price and quantity in a market. When supply is the same as demand, a market equilibrium is achieved, resulting in a stable price level. However, any imbalance between supply and demand creates price pressure, driving prices either up or down.
If demand exceeds supply, shortages occur, leading to upward pressure on prices. Conversely, when supply exceeds demand, surpluses emerge, causing prices to decline as producers seek to offload excess inventory.
Impact on Investments
Understanding supply and demand is crucial for investors, as these forces drive asset prices and market trends. When demand outstrips supply for a particular asset, its price appreciates, benefiting investors who hold the asset. Conversely, an oversupply scenario can lead to price declines, eroding investment returns.
How to Invest
Decide Your Investment Goals
Before diving headfirst into an investment, it’s crucial to define your objectives. Ask yourself: What do I aim to achieve with my investments? Whether it’s saving for retirement, funding your child’s education, or simply growing your wealth, setting clear goals is very important.
How Much Can You Invest
Determining how much to invest is a delicate balance between ambition and caution. Assess your financial situation and allocate a portion of your disposable income toward investments. Remember, consistency is key—regular contributions, no matter how modest, can snowball into significant wealth over time.
You don’t want to overstretch though, it’s important to still enjoy life.
Establish an Emergency Fund
Before funnelling all your resources into investments, ensure you have a safety net in place. Set aside a portion of your savings as an emergency fund, this provides a financial buffer against unexpected expenses. Aim to maintain three to six months’ worth of living expenses in accessible savings.
Risk
Investing inherently involves risk, and understanding your risk tolerance is paramount. Are you comfortable with market fluctuations, or do you prefer more conservative investments? A thorough assessment of your risk appetite will guide your asset allocation and investment decisions.
Understand What Type of Investor You Are
Are you a hands-on investor, eager to research individual stocks and actively manage your portfolio? Or do you prefer a hands-off approach, entrusting your investments to professional fund managers? Understanding your investor profile helps tailor your investment strategy to align with your preferences.
Build Your Portfolio
With your goals, risk tolerance, and investor profile in mind, it’s time to construct your investment portfolio. Diversification is key—spread your investments across various asset classes to mitigate risk and maximise returns. Balance high-risk, high-reward opportunities with more stable investments to achieve a well-rounded portfolio.
Seek Professional Guidance
Navigating the intricacies of investing can be daunting, especially for beginners. If you’re unsure where to start or overwhelmed the countless options, consider seeking guidance from a financial adviser. They can help you craft a personalised investment strategy tailored to your goals, risk tolerance, and financial circumstances.