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How to invest your money

How to invest your money

Investing has become an effortless thing to do. The rising popularity of numerous apps that let everyone invest freely and without any, or very small, commissions means that almost anyone can start investing with as little as a few dollars. However, the accessible entrance to investing does not mean everyone knows how to invest. Putting your money into work needs to be taken seriously and requires planning, careful assessment, strategy, and goals. And that is what this article will be about.

What to know before investing?

Before anyone puts their money into any fund, financial asset, index, or anything else, the investors need to know what they are looking for with that investment. Are they looking to invest for 40 years and plan to retire with that money? Are the investors planning to use that money in 7 years for a mortgage payment? Are the investors expecting to use that money as a college payment for their newly born baby?

These questions and countless more can help investors decide where and how to invest their money best. It is easy to see that different factors can help with the decision-making of how to invest. And we will pay closer attention to a few of them. It is also important to note that the order of these factors is random. Before investing, the investors should consider all of them and adjust their strategy accordingly.

1. Time horizon

The first factor that the investor needs to know is when they expect to use that money again. At what point will the money be needed or wanted and then spent? Is the “payout period” expected to be five years or 35 years? Deciding on the time horizon is crucial since it affects the type of risk that the investor can take. When to buy and not to sell is an important question connected to investing, which is a reason why we have looked at it more closely in our previous article.

For instance, if anyone wants to invest for five years, the portfolio should probably be less risky than the portfolio with a time horizon of 35 years. This is simply because the stock market tends to have an upside potential over the long term; however, it might be subject to a correction. If that happens in 5 years, the portfolio of the short-term investor can suffer significantly if it is too exposed to equities.

2. Risk appetite

Closely related to the time horizon is the risk appetite. This factor might be a bit more challenging to assess, but it is as essential as any other factor. Being a more risk-averse investor, one would be looking more at a safe, stable portfolio that consists of assets or asset classes that are not subject to extreme volatility. The majority of the portfolio might thus be divided between bonds, real estate, or in some cases, into commodities, with a smaller fraction of stocks or cryptocurrencies.

On the other hand, risk-loving investors might be preferring more significant exposure stocks and cryptocurrencies over assets such as bonds. That does not mean that the portfolio should only consist of cryptocurrencies and stocks. Still, a risk-loving investor might not want to see 50% of their portfolio in bonds.

3. Diversify

As was mentioned above, the portfolio should definitely be diversified. Putting money in one basket is always risky since the markets are unpredictable. Therefore spreading the money into different assets and financial products might be a relatively easy way of protecting or building your wealth.

Moreover, one can not only diversify between different asset classes but also between different subsectors of the same asset class. For instance, with cryptocurrencies, investors can decide whether they want to invest in Bitcoin, in altcoins connected to DeFi, Metaverse, NFTs, different platforms, and many more. The same applies to stocks or commodities, but the investors should know that before deciding to invest.

4. Costs

If the investors decide to start investing, they need to be well aware of the costs they will be paying. What are the fees for the given product or portfolio allocation? What are the fees of the broker, financial analyst, or portfolio manager that will be deducted from the investors’ profits? Even though it might look insignificant, the size of the fees can reduce the overall result of the portfolio quite significantly.

5. Goals

And to tie everything together, the investors need to know precisely why they are investing. Why do they want to begin investing, what do they expect from it, or the main aim of investing. The question of “why” connected to investing blends every other factor together and helps significantly decide how to invest correctly for the given investor.

Other factors and individual approach

Obviously, numerous other factors can affect the strategy put in place before investing. The size of the capital being invested, the frequency of investment, or the very nature of investment (one payment or regular payment) all affect the overall strategy that should be chosen. Moreover, some investors might prefer putting their money into cryptocurrencies; some might like real estate more. Thus it is all very individual. Their approach to it should also be carefully thought of with every single investor.

Different types of investments

The financial world is big enough to offer a vast number of different assets, financial tools, or different products and services, where investors can put their money into work. They offer not only further potential for returns but also various risks connected to them. For instance, stocks usually tend to provide the highest returns out of traditional markets but also are the most volatile and thus carry the most significant risk.

On the other side are, for instance, bonds. More flattened movements specify this asset class. Bonds tend to be less risky but also less profitable. Their role in the portfolio is usually to reduce the overall risk to investors.

Commodities represent a rather interesting financial asset class. These assets usually go against traditional assets like stocks. They are also a reason why investors tend to include them in the portfolio. They serve as safe-haven assets in the portfolio, and they move countercyclical or against the trends and sentiments. Thus commodities are not usually seen via their ability to earn money, but primarily as a way to stabilize the portfolio’s movements during any time of the market cycle.

While there are numerous other asset classes, there is one that has seen an explosive rise in the recent past. This asset class is represented by assets like Bitcoin, Ethereum, Binance Coin, or Tether. We are obviously talking about cryptocurrencies, which are by many still described as a Wild West due to their unregulated nature. Due to fewer regulations, cryptocurrencies tend to move much quicker and more significantly to both sides, upwards as well as downwards, offering more trading opportunities but also higher risk.

How to make an investment

As with asset classes, the ways one can invest are numerous as well. Investors can choose to invest via banks, exchanges, brokerage, or asset management companies. Investors can also choose to invest on their own.

Obviously, just like with different investment assets, the ways how one can invest vary and should be fitted to the needs of the individual investors. For instance, a high net-worth individual with the main goal of preserving their capital might prefer to use the services of an asset manager over investing on their own.

On the other hand, an inexperienced investor without any knowledge of the markets might be more interested in using the services of a bank or a broker, with a specialized team of economists, financial analysts, or experts ready to help.

How to include cryptocurrencies in the portfolio?

Cryptocurrencies are still a relatively new financial subsector that needs to be cautiously evaluated before it can be included in the traditional financial portfolio. Investing in cryptocurrencies is not only new but also different. We have looked at various possibilities of how one can invest in cryptocurrencies right here.

However, more renowned investors and financial institutions are now looking for ways to get exposure to these assets. Some believe that 2 % of capital in cryptocurrencies is enough; others go as high as 10 %. The decision is obviously always individual. However, the power of cryptocurrencies in the investment portfolio cannot be ignored anymore.

Conclusion

Deciding on the overall investment strategy might be a bit daunting process. There are numerous different factors that investors need to take into account before they start putting their money into work. Choosing the right investment strategy is as crucial as choosing a car or a house. It should serve investors in their best interest and should be directly built to help them reach their goals.

If you are unsure of how to build your portfolio or which strategy to choose, we are here to help. Feel free to contact us at any time, and we will be happy to help you start.

Published: 19. January 2022
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