Have you ever daydreamed about your future net worth? The key to a bright future net worth might be unraveling the mysteries of the investment markets. There are so many investment options to choose from, difficult terminologies to grasp, little money to invest and of course the risk of losing it all. You may have heard of the inspiring stories of people who invested their life savings, struck gold and walked away millionaires, but an equally large number of people have shared their horror stories of how they lost everything they had to the market. One would think investing is no different from trying your luck at the tables in Vegas.
So, is investing a gamble? Does it involve luck and cunning or is their method to it? Most people are convinced that investing in the stock market is a senseless risk especially with historical examples like the great depression as reference points. They think it is an indulgence for the wealthy who can afford to lose substantial sums and walk away unscathed or the Wall Street sharks who can keep up with the cutthroat business of stock trading. This could not be farther from the truth.
Investing is not just for the rich and the greedy. It is actually a way for the un-wealthy to build future net worth. It can be an easy way to change your financial situation and that of your future generation's net worth for the better.
We all have life goals, dreams of the brighter futures we hope for our children and ourselves. It could be, owning your dream home, sending your child to a prestigious college, making enough money for a comfortable retirement or simply building future net worth for the price of mind. You can save all your life and still fall short of achieving these goals. Proper financial planning is the surefire way to make your financial goals a reality whatever they may be. A financial plan links your finances to your goals. It involves proper budgeting and making wise investments, whether you invest directly or through a 401K, IRA, etc.
How to Invest
For most middle and low-income Americans, money is tight. Many live from paycheck to paycheck with all their money tied up in survival so they do not have extra money to invest. However, even if you could manage to spare some of your hard-earned money for investing, where would you even begin?
- Learn the basics of investing
- Risk vs. Reward: Risk can be defined as the volatility of an investment based on the rate of return, which depends on fluctuations in price. For example, stocks have a higher risk than bonds since they are more volatile. Investing is about the reward as much as it is about risk. In an efficient market, the two should correlate. That is, the higher the risk the greater the potential of reward. You cannot trust an investment that promises high returns at minimal risk.
- Investment horizon: This is basically the duration of your investment. Ideally, long periods absorb risk and translate to higher returns especially in the case of bonds and CDs.
Risk and time are the building blocks of investment return (reward). The expected return is the sum of the time horizon premium and the risk premium. This means that the higher the risk of your investment and the longer the investment duration, the higher the expected return. This is with the exception of times of high inflation. High inflation may deplete your investment return.
- Develop a financial plan
A financial plan is a blueprint that gets you to your financial goals. Developing it entails three parts: first, gauge your current personal balance sheet to know where you are today. Secondly, layout your goals showing where you want to be tomorrow and finally determine what you need to do to get there, that is the investment strategy required and an asset to be allocated to it.
Tips for a successful investor
To be a successful investor, and build future net worth you must first have a clear idea of what you hope to achieve. This should help you know what to get into and what to avoid. Finally, you have to prepare for the worst in as much as you hope for the best. This means assessing possible risks and finding ways to mitigate them. Here are some pointers to make you become a successful investor.
- Invest in products you understand – You can invest in land, real estate, bonds, equities, cash, gilts, and so many other options. The key is to play on your strengths and invest in something you understand and can be good at. Do not just ride the wave and invest in something deemed “the next big thing.”
- Diversify – To reduce risk, you should invest in several different assets. For example, if your house is your only investment, you stand to lose everything in the event it is destroyed by a natural disaster. Also, avoid investing in only one sector for example tech stocks. This is because similar stocks have a similar price variation pattern.
- Maintain your cash flow – Your investment plan will not amount to anything if you keep dipping into it. Make sure that you have enough cash flow to sustain your family and budget appropriately for your investment goals.
What tips or resources would you offer to a new investor to grow future net worth?
Brian is a dad, husband, and an IT professional by trade. A Personal Finance Blogger since 2013 who, with his family, has successfully paid off over $100K worth of consumer debt. I want my three children to handle money better than I ever did at a young age. I have been teaching them as much as I can for the last 10 years. My goal is to continue to champion the financial literacy message and then why I created the “How To Rock Your Money” book. To help teenagers navigate their financial futures. I hope my family’s story of paying off over $100,000 worth of debt will inspire and motivate you to take control of your money. He blogs at BrianBrandow.com