You have probably been told that investment is the key to creating wealth. However, as a young investor who saw or heard about the 2008 financial crisis and the 2002 dotcom bust, it can be a wary journey.
Investing means taking a risk. It doesn’t mean you shy away from it. The earlier you go in, the more your chances of effectively learning and meeting your financial goals.
However, investing is not as easy as putting your money into something. First, you must learn about the various investment options and strategies and know when to invest.
This blog will guide you through some steps to an effective investment strategy for small investors.
What is an Investment Strategy?
An investment strategy is a style of investment guided by principles geared towards achieving preset financial and investment goals.
Your investment strategy will entail how you create your portfolio(s), what portfolios you’ll avoid, and how often you check your investment and goals. Of course, this depends on the individual’s risk tolerance, ambitions, capital, and needs.
What is the Best Investment Strategy?
The strategy you choose depends on various factors. However, here are the best investment strategies:
- Buy and Hold– You buy an investment and hold it for a while.
- Buy the Index– You find an attractive stock index and buy an index fund based on it.
- Income Investing– You invest in assets that give cash payouts, dividend stock, and bonds
- Dollar-cost averaging– You continuously add little amounts into your investment over time instead of one lumpsum investment.
6 Steps to Creating Investment Strategies for Small Investors
Let’s look at steps to creating strategies you can use in investing as a young person.
Step 1: Learn about Investment and Finances
You need to understand an investment before undertaking it. You need to know what you are doing and the consequences.
Sadly, investment and finance are not topics taught in school; when they are, it is just definitions. So, it is up to you to learn the few basics of financial skills and investment.
Learning about investment ensures that you are making well-informed decisions. The field is vast, but some investment and financial areas for young investors to start, include:
- Saving
- Types and areas of investment
- Budgeting
- Financial metrics
- Taxes
Knowing what the basics mean gives you a better chance of starting and learning more complex things as you continue investing.
Step 2: Clear your Debt and Save
The most significant advantage a young investor has is time in the market. The best you can do is start to save immediately.
While your income may be low, you can still save if you remain disciplined. First, note down your expenditure and single out the necessities. Then, for the remaining leisure expenditure, you can look at what you can forgo.
Alternatively, you can save some money from the salary, then budget for the remaining.
You also need to clear your high-interest loans. You can’t effectively save and invest if you have high-interest rates bearing down on you each month.
Small-interest loans shouldn’t hinder you from saving and investing.
Step 3: Establish Investment Goals
What are you investing in, and why are you investing? If you can’t answer these two questions, you must go back to the drawing book.
Start your investment journey with a clear picture of what you want and when you want the results. It will help you decide what kind of investment to choose. If you wish to have the returns in a few months, you must go for an investment that can deliver within the period.
Goals also help you determine the types of risks you can handle comfortably. In return, it helps narrow down the investment path you may want to take.
Step 4: Diversify your Portfolio or Spread the Risk
One of the skills of a successful investor is investing in various portfolios.
When you invest in various assets, you spread your investment risk. So, whenever one of the investments fails, and you lose money, your other portfolios remain unaffected.
The primary ways you can diversify your portfolio include:
- Between Asset Classes: You’ll invest in different assets like bonds, stock, real estate, cryptocurrency, etc.
- With an Asset Class: It means you invest in different assets belonging to the same asset class. For example, you invest in several digital coins instead of a single crypto coin.
One perfect way to diversify your investment portfolio is through exchange-traded funds(EFTs). They expose you to various assets from one platform.
Step 5: Control Your Emotions
The markets are always going to shift. So, you should avoid making rash decisions when the market is volatile.
You must get control over your impulses to avoid adjusting your investment when things are either good or bad. Your investment plan and strategy should be able to account for such scenarios so that you can deter reactions.
You could also reduce the number of times you check your investment. It may make you forget your goals and react to small movements.
Focus on the end goal and mitigate the anxiety that accompanies market swings.
Step 6: Know What You Can Handle
Do you hate losing money? How much money are you okay with losing?
Having an honest look at the amount you are okay with losing is among the good investment strategies for beginners. Investments are risks; they could go well or fail, meaning you will lose the amount you invest.
While it is easier to save money knowing you’ll earn some interest, you can opt to start slow on investment. You can try the investment with low amounts and increase them when you are comfortable.
What Should a Young Investor Invest In?
Here are some best investment products and services for a young adult.
- Saving for retirement: Saving money in the bank accrues high compound interest rates. That is a considerable amount for you, thanks to your time.
- 401(k)s and IRAs: If employed, the IRAs and employer-sponsored retirement plans are perfect. They usually provide matching contributions that increase your savings.
- Money market funds and Short-term CDs: These are short-term investments that provide safety and liquidity to your idle cash.
It is crucial to understand that investing in EFTs that track the market and allow dividends and interest to build up over time usually pays better than short-term investments.
Get the Best Investment Advice for a Young Person
Investing as a young person increases your chances of a satisfying financial life. At a young age, you still have the time to learn about investment and to invest in long-term investments that will give your high returns. Look for a good investment and ensure you know your risk tolerance and goals.
You can always look for an experienced person to show you the ropes.
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