Here’s How You Can Start Investing Even If You Don’t Know Where To Start
The other day I was talking with a client and she told me “Brittney, I finally feel like I understand investing because you explain it as if we are just two girlfriends talking over lunch. You make it so easy to learn and I feel like I finally know what I’m investing my money in!”
I’ve been a financial planner for over 13 years and one of the biggest reasons I started my own financial company was to help smart, savvy women understand money and finally feel like they could come to a financial planner without feeling judged, talked down to or ashamed for not knowing personal finance and investing principles.
I know how overwhelming investing can be, but the truth is once you dive into this new subject, you will find it isn’t as scary after all and a few smart investment strategies can go a long way in your overall financial plan and success.
Regardless of where you stand in your investing career, just starting out or a seasoned investor, here are three tips to get started in investing.
1. Understand Compounding Interest
To me, this is like the 8th wonder of the world as it really does work like magic when it comes to growing your money for the long term. The simple way to understand the power of compounding interest is by the rule of 72. Basically, the rule of 72 tells us how many years it will take to double your money given a specific interest rate.
For example, let’s say you have $5,000 that you can invest in a lump sum today into an investment that returns on average 4% per year. By using this rule, 72 divided by 4 is 18, so every 18 years your $5,000 will double.
$5,000 today, 18 years from now $10,000, another 18 years from then, $20,000 and so forth.
What if you took that same original $5,000 investment and instead got an average annual return of 8%? Now your money will double every 9 years.
So after the same 36 years instead of $20,000 from the 4% investment, you can potentially have $80,000. That is how compounding interest will help you build wealth over time. It helps your money make money which of course is a very wise financial move.
Don’t put all your eggs in one basket. I know this sounds easy, but yet so many people still don’t understand the importance of having a diversified portfolio. Basically, it means to have a little bit of everything in your portfolio. So a mix of different types of mutual funds whether they are stock mutual funds or bond mutual funds, real estate and possibly business equity in your overall investment portfolio.
Think of it like a pie, if one slice of the pie is eaten and no longer has value then it’s okay because you still have the rest of the pie remaining. Diversification helps minimize your risk over time as you never have all your eggs in one basket, i.e. one investment category, one company, etc.
I know investing can be confusing, so start by reading and learning more about the differences between a stock, bond, mutual fund, real estate. This will help you have a better understanding of what is most appropriate to hold within your own investment portfolio.
Remember everyone is different so your mix of investments may be different from your neighbors and that is okay as you may have different goals, timeframe, risk tolerance, etc. Find the mix that is right for you and keep that diversification going!
3. Focus On The Longterm And Keep Emotions Separate
One of my favorite investing quotes is from the successful investor Warren Buffett who says, “be greedy when everyone else is fearful and fearful when everyone else is greedy.”
Basically what this means, is you have to be clear-headed when it comes to your longterm investment strategy and not let your emotions get the best of you when the stock market fluctuates up and down. Most people react to the swings in the stock market and panic when Chicken Little on TV is telling them the sky is falling so they make irrational decisions regarding their investment portfolio.
If you can remember Warren’s quote, then during those times of stock market dips, if you were in control of your emotions, you might be able to see that there are investment opportunities to take advantage of, for example buying more of a position if you found it a value in the market, versus being fearful and panicking and perhaps selling at a loss like most people end up doing.
Again, investing is complex and what I am saying may not apply to everyone so please do your homework and work with a financial professional you trust to help you build the right investment game plan so you can stay the course for the long-term.