The world of financial investment has changed dramatically over the last few decades, and thanks to new technology and a wider awareness of how the stock market and other investment vehicles work, more people than ever are now taking the opportunity to invest.
Investing for most people is not about spending all day studying the markets and trading shares, it is a convenient way to put any spare money to work. The hope is that over the long or medium term, the value of the shares purchased will increase, enabling investors to meet some big expense, secure a happier retirement or just to enable them to take the holiday they have always wanted.
The benefit of investing is that it enables you to profit from what is known as compound interest. For those of us prepared to be patient and to invest some of the money we earn for long-term growth, compound interest helps a first investment to grow significantly because interest is calculated on the principal sum, and on any earnings the investment achieves year after year. So how do you get started? Here are some of the most important things to remember when you are setting up your first investment portfolio.
Goals and risk
Why are you investing? Is it a long-term, lifetime portfolio, or are you hoping to raise a certain sum of money in the medium term? The more patient you are prepared to be, the less you need to risk with any of the investments in your portfolio. This is where risk also comes into play. If you are young and are happy to accept a higher degree of risk, including the possibility that your investments value might fluctuate significantly, then this will lead you to potentially more lucrative but riskier investments.
Steer clear of day trading
Investment is about obtaining a long- or medium-term return, not about instant profit, or trying to grind out a daily percentage through buying and selling shares on a daily basis. Given that every time you carry out a share trade, you will have to pay a fee, day trading can turn out to be costly as well as time-intensive. Your portfolio should be a collection of investments that you don’t need to monitor every hour. Sure, you will need to do your homework before making an investment, and that is when a great stock website can come in handy. But by executing what Warren Buffett calls a buy and hold strategy you can build a profitable investment portfolio without having to be hunched over charts or watching financial news screens all day.
Balance and spread
The key to organizing your investment portfolio is to ensure that it is well balanced, so that if one area falls short, the others can compensate. Look to build up a portfolio with a range of investment vehicles. Your shares should be in large, small and medium sized companies, spread across different sectors, and these can be supplemented with investments in a variety of funds, bonds and even real estate. Diversification is the key to creating a good portfolio.
The best investment portfolios are held by investors who have a clear idea of what they are aiming for; a diversified and varied selection of investments. They must also have the patience to hold those investments for the longer term, reinvesting periodically to take advantage of growth possibilities and dividend income. By following the advice outlined above you will improve your chances of being a successful long-term investor.