You’ve finally saved enough. Now make it grow!
Choices! Multitudes of choices. Bewildering, yes. Exciting, yes. But which ones are the best for you?
Investing choices are a vast, ever-evolving universe, with so many new, radically different instruments available today compared to the basic menu options of your parents’ generation: stocks, bonds, real estate, tangible commodities, and cash and/or equivalents.
Today, there are over 125,000 mutual funds, and more than 7,100 exchange-traded funds (ETFs); there are thousands of hedge funds, unit trusts, swaps, CDO’s, futures, options, forwards, mortgage-backed and asset-backed securities. You can ride the rollercoaster with funds that track volatility indices, or play in the relentless currency foreign exchange markets, or lean into the latest investing trends — cryptocurrencies and NFTs (non-fungible tokens) — which are dominating current media headlines.
When securities are further categorized by industry/sector, country, risk profile, ESG focus, etc. – or when multiple instruments are creatively packaged into a single diversified product — it’s clear to see that there are as many investing categories as one’s imagination can conceive, which could be a paradox of choice.
Narrowing it Down
Before deciding how to proceed, ask yourself a few important questions first:
- How much of your hard-earned savings are you willing to risk by investing in the markets?
- What kind of investor are you? conservative, aggressive, or somewhere in between? How panicked would you feel if you saw the value of your portfolio going down in response to a dip in the markets? In order to tailor your investments to your risk appetite, it is critically important to understand your personal financial capitulation point.
- What is your time horizon for investing? i.e. when would you look to withdraw money from the portfolio? This will tie in to your age, your purpose for investing, and your general objectives for your money (safety/capital preservation, or growth).
Capital markets fluctuate in value and volume regularly, accompanied by waves of unbelievable security price escalations along with even more rapid drops. Comfortably experienced investors tend to regard these oscillations as temporary – they’ve seen it all before. New investors however, have a more difficult time controlling emotional responses, and watching fluctuating markets can have you experiencing everything between euphoria and despair in a short period of time. Be aware of this very normal reaction, but also be confident in the markets’ tendency to correct themselves after shocks, and stick to a long-term strategy rather than a short-term outlook.
How to Start
You might not know it but you have actually been investing for years. We are surrounded by our investments all the time in the form of the products and services we routinely use, buy, consume and enjoy. We may not associate them as such but the public companies that produce those products and services we use every day, are stocks that are traded every day.
- Pick out a single security or two; a company that makes products or services that you use every day. Apple, Netflix, a financial services firm, a car manufacturer, your favourite sports apparel brand. For some ideas, check out the chart below that lists a number of daily activities and their related corporate enablers.
- Next, start to learn about these stocks and their underlying companies.
- Locate the stock trading symbol, watch the stock values on a finance website on a daily / intermittent basis and get a feel for how they’ve performed over the past several years.
- Get comfortable with the instruments available, there is a learning curve. Learn about stocks/equities first, then bonds/fixed income, progressing onward to mutual funds, ETFs and other collective investment options that fit your investment strategy, risk profile and time horizon.
There are thousands of financial informational websites to peruse. Yahoo! Finance, Investopedia, The Balance, The Financial Samurai, and Wikipedia are just a few. I highly recommend the beginner’s investing book (free download link here) “Learn to Earn,” as well as multiple YouTube videos by Peter Lynch, the legendary manager of the Fidelity Magellan Fund and an investing genius, who is still active today.
What Choices, How Much to Invest and How Much Time Do You Have?
Your investment choices will be predicated on these factors:
- How much you want to invest to start with
- How much time you have to monitor/trade if doing-it-yourself
- How diversified you want to be
- How comfortable you feel about the entire process. Let’s cover some of the most likely options a new investor might consider:
Self-directed trading using a brokerage/trading platform:
What you are doing: purchasing/selling individual securities on open markets. Pro’s: You’re in control of your own book and all trading decisions. Con’s: Can be costly to accumulate a sufficient number of security positions for adequate diversification; higher anxiety monitoring never-sleeping capital markets’ activities.
Buying ETFs (exchanged traded funds):
What you are doing: buying a basket of securities that track to an index and are traded on an exchange just like individual stocks, bonds, etc. Pro’s: More diverse than single securities; generally very liquid. Con’s: Prices will fluctuate with capital market activity.
Investing in mutual funds:
What you are doing: Investing in a separate and distinct stand-alone portfolio of securities, which has a defined investment policy strategy/style, and is traded once a day by fund firms or investment banks.
Pro’s: Mutual funds are actively managed by a professional portfolio investment team.
Con’s: Higher management fees
The newest new thing.
What you are doing: You, working with a personal advisor, assess your comfort level in choosing the risk profile that fits your personality. Your money is placed in your personal portfolio and managed using a robo-advisory algorithm portfolio construction that is efficient, intuitive, precise, and outperforms active management. You also can start investing with relatively small amount of money and you can track your progress 24/7 and make deposits in real time. We believe this is a great option for the new investor: the management fees are cost effective, you benefit from personal interaction with a knowledgeable financial advisor, and the robo-advisor does all the investment management work for you efficiently and inexpensively. Robo-advisor brand iInvest at Clarien, is highly recommended.
Get the basics right first! Educate yourself to the degree you are comfortable with. Understand that with the first three investment strategies above you are basically on your own. You purchase the single security, an ETF or a mutual fund, then it is up to you to track its performance and make decisions accordingly. This takes time to learn and understand, if you have the interest and the time it is worth the effort, but today there are options like iInvest that get you in the market with ease, and with solid investments and investing advice, without feeling like you need a masters degree to understand it all.
More from Investing Today by Clarien:
For more information, visit www.clarieniinvest.com
Martha Harris Myron, a native Bermudian with US connections, is a qualified international cross-border financial planner, the author of The Bermuda Islander Financial Planning Primers, since 2016, a Google News Contributor (50+ articles), international financial consultant to the Olderhood Group Bermuda Ltd., and financial columnist to The Royal Gazette. Contact: [email protected]