Investing is a crucial part of one’s personal finance. The problem is that many people don’t have a clue on where to start and don’t feel comfortable when they meet with a financial advisor. You can’t become a pro of market trading overnight. But it doesn’t mean that you should be stuck investing in a savings account making 1% per year either! If you are a beginner investor or you have no clue about where to start, then this article is for you!
Where to Start Investing?
Investing can be quite easy if you agree to dedicate a few hours to understanding how it works. A good place to start would be with a financial advisor. Some people prefer to buy a few books and teach themselves but I still think that there is nothing better than a 1-on-1 meeting. Ask your friends and family, you will certainly find someone who is satisfied with their advisor.
A good financial advisor will explain to you how the market works, how you can invest and the fees related to transaction. He should “take you by the hand” and walk you through all your questions. If he doesn’t do that, he is a poor advisor, start looking for another one before you invest!
Setup a Systematic Plan
You can’t really know what you are doing unless you are doing it ;-). This is why I think the best way to start investing is by setting up a systematic investment plan. Through an automatic withdrawal from your bank account, you will actively invest in the stock market each month. I suggest you setup the systematic plan the same day you get your paycheck. With this method, you will pay yourself first and start saving money.
If you are not sure about what to do, simply start with $25 per pay. You can likely cut a $50 per month expense out of your budget that can be transformed into a $50 monthly saving plan. Just for fun, if you calculate how much you will get by investing $50 per month for 3 years, you will have $1,915.44 with a 4% investment return. That’s enough to pay for a nice trip and you haven’t struggled too much to save!
On his website, Dave Ramsey has a great investment calculator that is easy to use and to understand.
Investor Profile? How Boring is That?
As I said it before, if you don’t know anything about investments, you are better off with a financial advisor. It is true that you will pay some fees (that diminishes your investment return) but you will learn a lot. Do you find it stupid to pay to take care of your teeth? Well, it should be the same thing with your wallet!
Your financial advisor will determine an investor profile to know your risk tolerance. In other words, he will test you to know in which circumstances you feel uncomfortable when looking at your investments. Some people can’t stand losing a buck while others understand that a loss on paper doesn’t mean that you have lost this money forever. A good example is to ask people who didn’t change their investment strategy since 2008. 5 years after the biggest crash in the history, someone who kept a well-diversified portfolio got his money back.
If you are curious to know about your investor profile before your meeting, you can complete a free test online. I like the one I found over at Edmond Financial Group. It is very complete and will give you a very good idea of your investor style.
Once you have determined your investor profile with your financial advisor, he will offer you a few options. Chances are that if you are investing a small amount, you will start with mutual funds. Ask him how they work and how much they cost. Make sure you don’t buy something with penalty fees (deferred sales charges) so you can withdraw from your funds at any time. Mutual funds are not the cheapest investment vehicle in the world but it’s definitely the best one when you have no clue of what you are doing!
If you want to start investing today, there are only 3 simple steps:
#1 Find a trusty advisor
#2 Start saving through a systematic plan
#3 Invest according to your risk tolerance
Once you start investing, you will receive an investment statement. Ask your financial advisor to explain it to you (where to find the value of your investments, investment return, how you are invested, etc). Then, if you like that, the best way to improve your knowledge is by reading a few books