A Beginner’s Guide to Understanding Investing

If you are a newcomer to investing, or you have yet to take that first step, you are probably feeling a bit intimidated. Everybody who is just getting started will feel overwhelmed. Investing seems like something that requires so much prior knowledge and expertise that surely can only come with experience. You are probably wondering where you are even supposed to start. This barrier is difficult for new investors to overcome, but you can get through it with a little guidance. That is why we have put together this guide to investing for beginners.

How to Start Investing for Beginners

First of all, remember one thing: it is never too late to get started. If that is a fear that has held you back, just let it go. Yes, it would have been better to start building your portfolio years ago, but the fact that you did not is no reason not to try at all. There is no time like the present. With that in mind, here are some key points to consider as you get started:

  • Decide how much to invest. Start by deciding what your investment goals are and when you would ideally like to reach them. This will give you an idea of how much you need to start out with.
  • Learn about the different investment options: Do some research on stocks, mutual funds and ETFs. A financial advisor will be able to tell you more and also let you know which of them better suits your investment goals.
  • Pick an investment strategy: The strategy you choose will depend on your age and your goals, among other factors. 

What do Investment Firms Do, and How Do They work?

While there are some investors who are knowledgeable and confident enough to manage their own investments, most people turn to professional investment firms. Whether safe but slow bonds, burgeoning yet risky stocks, or something in between, investment and wealth management firms take on all the effort of selecting investments and open up new investment opportunities for you. 

With an investment management firm on your team, you can make the most of the money you invest. Your investment managers will build a portfolio of securities, such as stocks, bonds and other options, based on your goals. Investment managers generally employ a three-pronged plan of action. First, they evaluate your financial goals and risk appetite, together with the amount of money you have on hand to invest. They then track potential investments that will suit your goals and risk profile. Finally, they develop a set of investment strategies that can be used to reach your goals. 

Why Alternative Investments Are The Best For Your Portfolio

Many investors today are opting for what might generally be described as alternative investments. These are defined as financial assets that do not fit into the conventional categories of equity, income or cash. These include tangible assets, such as real estate, valuable collectables such as art, wine or antiques, or natural resources like commodities, farmland and forests. Some financial assets are included under this umbrella term. Examples are venture capital, private equity and hedge funds.

Many investors favour these sorts of assets because they are far less volatile than financial instruments, especially in today’s troubled markets. Stocks and equities are priced quite high, and their forecasted future returns are not as appealing as they may have been in other eras. Alternative investments thus offer safer, and potentially more lucrative opportunities. 

The Top 3 Benefits Of Using An Investment Firm  

If you are starting out as an investor, you are likely to ask, “Why use an investment firm?” Well, there are other ways to invest, but working with an investment firm provides several benefits that most new and established investors will find very appealing. The three primary advantages are:

  • Diversification: You can prevent any one investment asset or asset class from being too heavily weighted, potentially affecting the performance of your entire portfolio. Because dissimilar asset classes — and even specific assets within the same asset class – react differently to conditions in the market, diversification spreads out your risk.
  • Professional management: One of the problems that many investors face is the temptation to make emotional, impulsive decisions. Investing decisions must be made clinically and objectively, as far as possible, driven by thorough knowledge and experience. If you leave your investments in the hands of qualified, professional managers, you won’t be tempted to switch your money over from one investment to a far less secure one that seems to promise bigger, faster returns.
  • Affordability: Working with an investment firm makes investing more affordable. If you try to invest individually, you may struggle to access large investments. By joining forces with other investors, via a management firm, you have access to the larger returns associated with major projects. Another invaluable, long-term cost-saver is mitigating your tax liability thanks to the insight of a team of professionals.

Financial Advisors 101 – What To Ask a Financial Advisor

Once you have decided to work with an investment management firm, you need to do a little research and vetting to make sure you choose the right one. It is better to meet with a handful of firms before settling on one. In your exploratory meetings, ask them the following questions:

  • How do you charge your fees?
  • What process do you follow to determine what I need from my investments?
  • What services do you offer? Wealth management firms will advise you on the decisions and options you have in order to make the lifestyle you want a reality. A wealth advisor will focus on the numbers to reach your goals, while addressing a range of planning issues and options such as tax, risk management, investment returns, keeping pace with inflation and estate planning. Have a wealth advisor to guide you every step of the way.

What Is An All-Weather Portfolio, and Why Do You Need One?

The concept of the all-weather portfolio was developed by billionaire investor Ray Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund.

The idea is to diversify investments in a way that the portfolio can perform consistently during periods of economic growth and periods of economic stagnation alike. Because it is passive in nature, investors do not need to make major asset allocation shifts if the market shows volatility or rising inflation, for example.

This concept is about building a portfolio that can survive any economic storm. Regardless of your risk profile or investment goals, you should have an all-weather portfolio in place to ensure your financial security and maximize returns.

Why You Should Start Investing As Soon As Possible

We said at the beginning that you should not be discouraged if you know you should have started investing years ago but never did. That being said, it is still important to begin investing as early as possible. Doing so enables you to take control of your financial future and reap the benefits of compound interest. Investing wisely means that you can better combat inflation so that you are able to afford your current lifestyle in the future. It makes your money work for you because of compounding. Compound earnings or compound interest simply means that any returns you gain are reinvested to earn additional returns. This is why the earlier you start investing, the more benefit you gain from compound interest or compound earnings.

Starting with a relatively small amount at a young age will create a good investment habit and you will reap the rewards later on. Not only will your retirement be more comfortable, but reaching goals such as buying your first car or home will be more attainable.

The Real Risks Of Investing, and What To Do About It

The truth is that, if you want to create good returns through investing, you have to be willing to take on a certain amount of risk. The level of risk will be different for each investor, but risk itself is a given and a constant. What do we mean when we talk about investment risk though – and how can it be managed? There are four major types of risk involved in investment and each of them needs to be handled differently to minimize them.

  • Company risk: When companies experience a high degree of business risk, they could impair their ability to provide investors and stakeholders with acceptable returns.
  • Volatility and market risk: Stock prices are determined by the two main determiners of anything in business: supply and demand. Demand for anything can change with little to no warning, and your stock could take a massive tumble. However, the smart investor can minimize exposure to these effects.
  • Opportunity cost: This is essentially the risk of missing out. When you choose to invest in one asset, you are essentially choosing not to invest in one of the many other options that are available to you. What if you make the wrong choice? While you do not want to risk everything, you do need to take some chances to achieve growth.
  • Liquidity risk: Liquidity is simply how quickly and easily an investment can be exchanged for cash. Stocks and bonds are relatively liquid while real estate is one of the least liquid investments available. This is not to say that all your assets should be liquid, but that it is advisable to have some level of liquidity in your investment portfolio in case of an emergency.

Based in Oakville, ON, Nour Private Wealth (NPW) is a team of experienced wealth management experts who help high-net-worth individuals grow and protect their wealth. If you are just starting out and need a little professional help with the ins and outs of investing for beginners, contact us and speak to one of our professional wealth managers.

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