Once you have established a firm financial foundation or put aside a little money, it is time to learn to invest. Many first time investors fall into the trap of waiting, and waiting until they “have enough.” The first thing you have to do is nix that notion, right now. You will find out by hearing these tips that even measly amounts can add up to great amounts over time. Others balk at investing because they think “I do not know enough to be a player.” That is right. You do not. The truly wealthy understand how money works and never start sentences with the words “I do not know.” If you do not understand investing and how it works, it is time to start to do the legwork.
So Investing 101: The primary focus of investing is making your money work for you instead of working for your money. Many wealthy people have perfected the art of creating their wealth instead of giving a service. Building wealth also means creating wealth that is sustainable and continues to generate even in the event that you are unable to work.
1 Learn the difference between having a high income and being truly wealthy. High incomes do not necessarily mean that you are rich, especially if this income comes from only one source. The myth persists that you can only be truly wealthy if you come into family money or are born into a home of silver spoons, silk sheets and antique furniture. Continue to believe in this myth, and you still have the mindset of the poor. Many of the middle class believe that a high income job is the end all of their existence and work their butts off to get to a position that pays in high five or six figure salary but end up baffled at how little they have by the time retirement rolls around. For example, the average high level manager earns $200,000 a year, with benefits but stands to lose that income in the event of layoffs or illness. Although his income earning potential is high, it only comes from one source. Contrast that with a middle level manager earning $50,000 a year. This middle manager, however, rents out properties in the city for another $500,000 and reaps dividends from stocks and bonds for another $100,000 a year. In the event of illness, death or mass layoffs, half of his earning potential is still secure. The source of the latter’s income is also easily passed on to future generations, securing wealth for the middle level manager’s family.
2. Choose your investment goals as these will decide your allocation strategy later on. A broker or brokerage firm can help you decide on what your plans are, as well as help you begin investing.
3. Research the different types of investments as well as how risky they are. In general, there are a few main investment types: Stocks is one type where you purchase partial ownership of a company and as part-‐owner, are entitled to annual profits. However, many people buy stock to sell when the price is high, not for dividends. The practice of buying low and selling high is relatively low risk but the potential for reward is governed by market and highly emotional changes. Yes, stock is considered an emotional asset.
Another type is Bonds – bonds are small loans to companies or governments that the investor pays for. They usually have fixed interest rates and are considered very safe and low risk investments. T-‐bills, municipal bonds and corporate bonds are some examples. Mutual funds are also a type of popular investment – this involves pooling money together with other like-‐ minded investors to buy a full portfolio, usually run by firms or money managers. This type of investment is often the starting point for many first-‐time investors, simply because it provides a more diverse portfolio from the get-‐go. Another is Real Estate Investment Trusts – these are companies that deal primarily with the ownership of real estate and manage a portfolio for you. They have the advantage of being diverse and easy to sell—as well as reduce the headache of managing your own property. Lastly, there are other alternatives – Generally these are the high-‐risk and high reward securities where the payoff can be huge but the risk is high. Real estate, commodities, FOREX, options and futures fall under this category.
4. Create an allocation strategy for your savings or income to minimize risk and spread out your investments to guarantee several streams of income versus just one. Learn about investing and accounting before you start spreading the money around. Consult with brokers or brokerage firm, especially if you have a lot to invest. Take night courses or read investment books to understand what you are getting into.