How to start investing for beginners? This question often arises for those who are just starting to enter the investment market. The reason for that comes from several aspects, from uncertainty to unable to read the risks. When it comes to risk, you will never find an investment product with the high return but low risk. This is the thing that you should remember all the time. It could be worse, especially when an investor does not know the goals that he wants to achieve. In helping you to avoid those mistakes, check out the reviews below.
Setting Financial Goals
In order to be successful in investing, you must first know and determine your financial goals. When you invest, you place your current funds into securities or tangible assets for the purpose of obtaining an increase in value, yield, or both in the future. It would be best if you had time, knowledge, and discipline to invest.
In addition, in investing, you must, of course, have a financial goal. Because what you do now will have an impact on your financial condition in the future. For example, suppose you have a goal of paying off debt. Therefore, you need to invest in instruments where you can use the yield to pay off debt plus interest. In essence, the actions you take now determine whether you can achieve these goals or not. When setting your financial goals, the things to consider are the sum of the financial goals and their time horizon; short term, medium-term, and long term.
We have seen many investors unable to decide the time horizon of their investments and earn something they do not want exactly in the end. This is critical, especially when you have concerned about your financial future.
After you set your financial goals, from here, you can determine your investment products. For instance, if you want a long-term investment for the purpose of a retirement fund. You may want to check some of the growth mutual funds in the market, such as MSEGX, ZVNIX, and so forth. At this point, you need to learn about its prospectus and fund fact to gain more insight into the mutual funds.
Understanding Risk Tolerance
Before you start investing, you need to know your risk tolerance. That way, you will have an understanding of which types of investments are right for you or which ones to avoid. Risk tolerance is the level of risk that an investor can handle when there is a decline in the value of the investment. Tolerance to this risk varies with age, stage of life, income, financial goals, and level of personal comfort. The most common way to determine risk tolerance is to fill out a questionnaire. And in general, there are three levels of risk tolerance for the investor profile:
- Aggressive: willing to accept maximum risk for maximum return, knowledgeable about the market
- Moderate: willing to accept some risks, but trying to find balance
- Conservative: has the goal of only conserving capital
One way to manage risk tolerance is to diversify investments. Diversification means investing in different asset classes (stocks, bonds, cash, and others) that move in different directions at different times. Or in other words, have no correlation. By diversifying your portfolio, the value of your total assets will be protected if a certain asset class drops in value over time.
Another example about this one is when you put your money on certain growth mutual funds like MSEGX; then you need to know about the companies that MSEGX invests in. You may consider looking at several related news about it to deepen your analysis. Overall, there is always risk in investment, but it also shapes its return which we will elaborate on in the next part beneath.
The Relationship between Risk and Return
The term High Risk High Return is often heard in the investment world. The principle is as follows:
- The higher the risk, the higher the return that investors will get.
- And vice versa, when the yield is high, then the asset will have a high risk.
Your investment options can be customized based on your risk profile. Investments in fixed income instruments and money markets have the lowest risk but also low returns. Then, after that is a gold investment that yields higher returns and is riskier. Then followed by equities or stocks, and the riskiest are cryptocurrencies.
Speaking of risk in investing, each type of asset has a different level of risk and return. You need to understand that the risks of different types of assets are also different. As investors, we need to understand what risks we face when investing, not just the rewards. Well, below are some types of risks that investors can face when investing:
- Interest rate risk – changes may reduce your returns (main risk for fixed-rate investments).
- Market risk – caused by economic changes that affect the entire market.
- Sector – when the risk occurs in a particular industry sector.
- Currency risk – will affect foreign investments involving currency exchange rates.
- Liquidity – when you can’t sell your investment when you need it.
- Credit risk occurs because of a default in the company or government to which you give a loan.
- Concentration – if you don’t diversify, poor asset class performance will significantly affect your investment.
- Inflation risk – when the investment value does not keep up with inflation.
- Timing – when you enter an investment, it exposes the value of your investment to a decrease and even a loss of capital.
- Gearing risk – when you use borrowed money to invest, and the value of the investment falls.
Fluctuations of price happen lots of times in the market. Hence, you only need to consider the risks. Understanding your goals, as we mentioned in the beginning, will help you a lot. Besides, if you have done the homework, then you should not worry about common things like this. Remember, the higher the risk, the higher its returns. It heavily depends on the investors themselves, which risks that they are comfortable with.