Warren Buffett once defined investing as “the process of parking money now for more in the future”. However, investments always include risk. So how do you get started with investing? How much money do you need to invest? Where to invest? Every novice investor asks himself these questions, the answers are simpler than you might think.
Investing aims to allow you to earn money while you are doing other things in life. An investment must make your money work for you day and night to get you money for travel, retirement, business aspirations, or whatever else you have in mind. But investing means taking risks (of losing your savings). This is the first thing to understand: reduce the risk as much as possible. If you invest in a single product there is the risk of losing other more profitable investments, if you diversify your investments you may not earn when one of your stocks rises sharply.
However, the rule of a good investment is to “diversify your portfolio in the best possible way and set goals from the start“. To do this, it is necessary to set some initial points from which to start the study (yes, without studying you cannot invest).
Quick investment tips
- Investing means committing money, also known as ‘capital’, in an instrument (shares, commodities, bonds, CFD, options, etc …) with the aim of obtaining profits
- Investing is the opposite of spending: investing is saving money for the future, making it grow rather than spending what you earn
- There are risks and possible losses with investments, but studying the markets and how to build an investment portfolio will help you minimize the risks
- The most common way for beginners to invest is with stocks and bonds
Types of investors and types of investments
With the internet, you can sit back and monitor your investments on your computer, or you can check everything with for investors on your smartphone. It is very easy to find an online broker who will guide you towards the right investments. But as the Latins used to say, first of all “nosce te ipsum”, or “know yourself”.
Before you decide to start investing your money, you should answer the question “What investor do you want to be?”, because different investors use different strategies and tools:
- Active investors: very “skilled”, they constantly monitor the performance of their stocks and keep up with daily financial events, follow the markets and have investment apps forsmartphone to stay up to date on what is happening. They may even trade daily, but that’s not the point: active investors follow trends and invest in specific stocks when they see interesting news. They often invest in tech brands and seek promising IPOs so they can see big gains in the short term. These investors typically don’t hold long-term investments if they don’t perform as expected
- Passive investors: they are more “observers”, they don’t care about the big gains and immediate profits, but they want to see the profits at the end of each year. They likely have mutual funds, which allows a fund manager to buy and sell based on their portfolio and goals. These investors often have some favorite stocks that follow and they don’t sell very easily (or rather: they don’t buy and sell in a short time, they are more holders)
- Speculatory investors: they seek short-term gains and how active investors follow market trends, but are actively looking for individual stocks that make them rich. Speculatory investors are highly skilled, take a lot of risks and sell assets immediately after making a profit. If you are interested in making big profits while taking risks, then you may want to consider speculation (not the best choice for first-time investors)
- Retired investors: they prefer to choose low-risk tools or safe investments even if the profits are smaller, because retired investors tend to slow down the purchase of risky stocks, unlike younger investors who tend to be active investors or speculators and who can manage losses in the short term as they have years, decades ahead of them
How much money do you need to invest?
There are two questions new investors typically ask when they start investing, one more general and one more technical.
Start investing: how much money do I need?
There is no one-size-fits-all answer, the choice of amount and economic possibilities are different from investor to investor. If you have at least $/€ 500 you can start investing. There are several ways to start investing with small amounts, a solution could also invest only $/€ 50 per month, in order to have a good nest egg.
The amount to invest also depends a lot on the type of instrument you choose. Some investments require large amounts, for others (for example speculative ones such as online trading) $/€ 100/200 is enough.
Instead, if you want to invest in stock, consider that share prices are very variable, from a few tens of euros or dollars, to hundreds or even thousands for a single share. For example, on February 16, 2020 the price of a Seabord Corporation share is about $ 3,100, that of an Amazon share of about $ 3,200, while a Microsoft share costs about $ 250, a Pinduoduo share is $ 195, a Groupon share $ 35.
How much to invest in a security?
Obviously the answer to this question depends on the investment strategy used, the type of security and the profits it can generate. The indications can only be general, each case must be analyzed in detail.
If you are investing through a fund, you can reserve a large portion of your portfolio for equity investments. For example, a 20-year-old investor could place 70% of their portfolio in equity funds. The rest of the portfolio can go into bond funds to invest safely. Individual securities should be kept at 10% or less of the entire investment portfolio.
How to diversify investments and minimize risk
When you invest in multiple instruments and markets, you reduce the risk of a single investment going wrong and severely compromising the return of your portfolio. If you want to increase your overall ROI or return on investment, you definitely need to diversify: even if you don’t get large and immediate profits from a diversified investment solution, your money will increase in the long run.
In general, you should start by investing in three or four types of investments. For example, mutual funds and ETFs are safe investments because they provide some security by investing in multiple companies at the same time.
“Diversifying investments” is however a very complex concept and cannot be explained in a few words, also because diversification depends on what type of investor you are and what strategy you adopt. Some useful guides:
- How to build an investment portfolio: 5 tips
- 3 investment strategies to build a low risk portfolio
- Asset allocation: the 6 key points for an investment portfolio that works
In conclusion, how and where to invest is a matter of experience and budget, but also of mental discipline and attitude: one must not improvise, but study an investment strategy and follow it, adapt it to events and have clear goals.