You finally have managed to pay off all your debt, created that emergency fund which will take care of unforeseen needs.
You have put together 1.000$ that you can finally put into something, that will return to you.
This is what you might have been looking forward to for quite some time – Now it is time to start figuring out how to build your financial future.
What is investing?
First let us deal with the basic question of Investing. The basic premise is that you take you capital, and provide them to someone who in turn creates value with them. The assumption is, that this will always go well and the investment returns more than you provided.
However this is far from truth. Many times investments go sour, turns out to be bad or doesn’t provide any return. This is generally captured as Return of Interest (ROI).
Sometimes the fairy tales of legends of investments also are told. For instance Warrent Buffet is one of those investors. However truth is, he’s a long term investor and took years and years to create his wealth.
There are no “Get Rich Quick Schemes”.
Visit the Bookshelf to buy books on investing.
What are the Risks?
As explained investments do not come risk free.
Some of the most common risks are that the company defaults and you loose the investment. Another would be, that the company value – if you bought stocks – are seriously reduced due to changes in the market or political landscape.
This is why when you invest, you need to understand the investment vehicle and consequence of making a bad invest.
Secondly you need to know, if getting into stocks, that they are highly volatile. Winding back to 2008 the entire world took a steep dive due to sub prime loans, and many banks in the financial sector defaulted.
While you will never know, it’s important to understand the risks involved with investing.
Another key aspect of investing is the time horizon you are looking at.
Any short term investing will be speculation – there is no sure fire way of knowing how things will go.
Lessons from many decades show, that short term it is nearly impossible to invest. However long term, the tendency is that the market will go up – even significantly.
This means that you should be ready to stick with you choice of a long time – as in decades. The proof lies in the average return of S&p500 since 1928, which is approximately 10% and 7% adjusted for inflation.
This means, that you need to garner your self with patience when investing. The markets are volatile and will not always favor your short term actions, but long term the evidence shows you will be significantly better off.
One strategy to pursue is to consider your investment as lost. This way you will not be tempted to pull it out at bad timing and loose money.
Since you understand the risks, time horizon and general concepts of an investment it is time to select your investment.
Competing with the pros
Going in you have to consider the following. The unicorns out there who are beating the market are not amateurs. The spend 80-100 hours each week following strategies, making analysis’ and discussing with companies on the out look.
If you believe you can beat them – then the best of luck!
Another key aspect of investing is to diversify. This is done by buying several stocks, bonds and alike to make sure you investment is not lost in one go.
A simple example is, that you take your 1.000$ and divide it equally between 10 companies. Should any of the companies default, you have lost 100$ rather than had you put all 1.000$ into that company.
However since we are discussing a rather small amount of money in this article, it is not really viable diversify your investment on your own. The transaction fees would consume any gains for a long time.
What you should choose between
Basically there are two good options out there for the small investor first time around.
Mutual Funds & Index Funds
Mutual funds are investment companies where the fund manager takes care of the portfolio. Often they target a specific nice and make sure to balance the portfolio according to a strategy.
These funds often have an administration fee as well as take a cut of the profits earned.
This can make them slightly expensive at low investment levels, especially if you hit a slump in the market.
Index Funds are what the name indicates. It’s a fund following an existing Index (This could be S&P500). Typically they will be low cost in the range of 0.5%-0.1% and return a market comparable share.
This is the cheapest and perhaps simplest type of investment, where you get the diversification in place. You literally own very small bits of a lot of companies, depending on how the index fund is composed.
Now it is your turn
It’s time you start researching more in depth and pick the right choice for you.
Leave a comment or reach out if you want to discuss what to do. We would also love to hear back from your endeavor investing your first 1.000$