Do you want to switch the office for a more profitable and less limiting way of earning money? Or, do you want to make some extra money for a more secure future? Statistics show that 33% of Brits own shares, while 74% of Millennials plan to invest after the pandemic.
To become an investor you need to learn and understand the core investing principles – these include active -v- passive investing, define your goals, identify a suitable investment strategy, build a strong and diversified portfolio, and monitor your results over the long-term.
Let’s take it slow and break down the “how to become an investor” mystery into smaller, manageable pieces. This simple guide will show you the easy steps that lead to making smart investments. I’ll back that up with some tips that will help prepare you for the world of investing. Let the fun begin!
7 Steps to Becoming an Investor
Getting started is always the hardest part. It all sounds complicated when you have no prior knowledge of the subject. But, you just need to chip away at that wall a little bit, before it starts to come crumbling down. While everyone’s path is different, knowing where to start can make it a whole lot easier.
1. Learn About Investing
Investing will be a whole lot less intimidating when you get to know it. But what resources should you use? What should you focus on?
You can start by exposing yourself to a wide range of information sources and absorbing the information through your preferred channel. We learn differently, so you want to pick the channel that will help you stay focused.
When I say, learn about investing, I mean, really dig deep and discover the ins and outs of it. Making informed decisions is the foundation of every successful investor—and you can’t make those decisions without knowing what’s out there.
You want to begin with comprehensive sources of information—like the book “Rich Dad, Poor Dad” by Robert Kiyosaki. This book discusses the principles, not just relevant to investing in the stock market but also investing in anything! Building up a portfolio of income generating assets so you never have to work a day in your life. An amazing book.
Let people who had walked down that road and crossed the finish line tell you their stories. They will show you the big picture, and what’s more—help you develop the investor’s kind of thinking. If you like to read, I have a list of a few great books I would highly recommend. These books will make learning about investing fun and also give you that edge over your fellow investors.
You can also watch videos, listen to podcasts, or whatever floats your boat. Don’t stick to concise and limited sources, but dive into people’s stories. In that way, you will uncover what investors with experience do and learn from their costly mistakes.
In terms of topics, what you want to direct your attention to is:
- Types of investments;
- Active vs. passive investing;
- Different investments risks;
- The awards that come from different types of investments;
- The fall and rise of property and stock markets in the last couple of years;
- How are investment capital gains and income taxed in your country; and
- How inflation affects the prices of assets.
To get warmed up for absorbing the ins and outs of investing, I recommend that you check out my posts ‘How To Make Investing Super Easy!,’ ‘Passive Investing 101: The Basics‘, and The #1 Investment For You,’ as these are perfect for newbies.
As you read, watch, listen, and learn, new questions will arise leading you to new topics. These are the basic subjects that will help you understand investing. How you push further will depend on what interests you.
Bear in mind that you don’t need to know every single thing about investing. Cover the essentials to get a general idea. Then, get more familiar with the type of investing you want to do. For example, if you want to invest passively, you don’t need to know the details about active investing. You just need to understand it. So, dip your toe in everything and dive deep into what grabbed your attention the most.
2. Define Your Goals
Knowing what you want to gain from investing will keep your actions streamlined. It will also help you decide where to invest your money.
Consider the following:
- For what reason do you want to invest? (saving for retirement, wedding, children’s college, a car, a home, paying off the debt, stop working at a 9 to 5 job, etc.)
- Do you aim for growth of capital or regular income?
- When do you need the money back? (2 years, 5 years, 10 years, etc.)
- Is liquidity important to you?
- What is your risk tolerance?
- How invested do you want to be? (how much time and effort do you want to spend on investing, if you want to spend them at all).
If you want to save for a home, I discussed this in the ‘Investing Money To Save For A House: Is It Clever?‘ post, so I’d definitely recommend giving that a read. On the other hand, if your goal is to turn investing into a career, you might find the post ‘How Can You Make ‘Investing’ Your Career? Here’s How!‘ very helpful.
Also, audit your personal finances to assess how much you can invest. Make sure to count in your living expenses and emergency fund before you single out the investing pile. You don’t want to get carried away with big investing moves if that will leave you without a penny.
3. Identify Your Strategy
The theory has been covered, the goal is set, and now you want to identify your strategy. This process mostly falls on research, so roll up your sleeves and get to work.
What can help you develop a suitable strategy is pinpointing your investor personality. According to the BB&K investor personalities categorization, this is how investors differ:
- The Adventurer—Confident people ready to take risks.
- The Celebrity—People who don’t want to be left out and follow what other investors are doing.
- The Individualist—They are analytical, methodical, and make their own decisions.
- The Guardian—Careful people who avoid volatility and usually need guidance.
- The Straight Arrow—Balanced people with bits of traits from all of the above-mentioned investors.
Based on your investor personality and goals, you need to surface your options and how they fit into your plan. Let’s say that you want to invest in bonds. The next step is to figure out if you want to invest in government bonds (gilts), corporate bonds, or others.
If you’ve got your eyes set on corporate bonds, which market are you interested in? Do you want to keep it safe with AAA bonds or risk it for the sake of higher yield with junk bonds? When will you need the capital? These are some of the questions you will need to answer. Oh, and if this talk about bonds got you fired up, head to my ‘Excited To Invest In Bonds? The Pros and Cons‘ post.
Outline the strategy to the very last detail. The research needs to be specific. Use it to make your way to your first investment.
4. Build a Portfolio
Diversification can help you keep your investment journey on the safe side. Juggling different types of investments across different geographic regions and economic sectors will make you more resistant to fluctuations and volatility.
Mix and match assets that historically haven’t moved in the same direction and aren’t prone to the same kind of risk—like combining fixed-income investments and equity-based investments. So, if a part of the portfolio is going down, the rest of it will remain.
For example, if your property investment in the UK falls through, you will still have your amazing stocks in a Netherland-based biotech company to prop you up.
Some brokerage firms provide model portfolios. They can diversify the assets based on your needs. Or, you can do the diversification yourself. Once you add different assets to the portfolio, you should keep building it. Do you need more clarification on diversifying assets? You can find more detailed information on it in my post ‘Only Invested In One Stock? Here’s Why That’s A Bad Idea.’
5. Invest
Learning and talking about investing won’t invest for you. Make that first step as soon as you feel ready. Don’t prolong the final decision if you have everything figured out. Instead, start small to minimise the fear of stepping into unexplored territory.
So, open an online brokerage account, go to the bank, schedule a meeting with a property investment business, or whatever you need to do. Just get moving.
You should also remember that you don’t need to do it on your own. Hire a financial advisor if you have any doubts. Stick to professionals with experience. Listening to your know-it-all dentist friend with zero investments in his portfolio isn’t the right move.
6. Be Dedicated
Despite some people’s convictions, investing isn’t a get-rich-over-night type of thing. You need to be patient and persistent to see results.
If you’ll be passively investing for a long-term goal, patience needs to be your best virtue. You should, however, keep an eye on the market. After all, you do have your money somewhere out there. Also, if a great opportunity arises, you might decide to seize it. Once you get that first investment out of the way, others will come more naturally to you.
On the other hand, active investors need to be dedicated and up-to-date with the trends. They should consistently learn about new tools and market changes. Educate yourself to continually keep that balance between risk and security.
7. Monitor Results
You should develop an investment routine that consists of portfolio monitoring and management. Stay up to date with what’s going on and take care of your investments.
Keeping track of how your investments are doing will prevent you from losing money unnecessarily. In case of notable fluctuations, you will need to rebalance the portfolio. If you take timely actions and stick to your strategy the loss will be less drastic. It will also give you a clear perspective of how your investments stand.
It’s important to note, fluctuations are just that – fluctuations. Stock prices naturally move up and down without too much influence from the underlying value of the business. If you check your stocks and they’ve dipped – don’t panic and sell. EVER. Find out what caused the dip and if it will impact your stocks likelihood of recovery. If it’s just a fluctuation – why not buy more stock for a bargain?
The evaluation can take place monthly or quarterly, depending on what kind of investments you’re dealing with. Be careful not to get addicted to tracking the change on the market—because this does happen. What this obsession can lead to are rash and impulsive decisions that will do you no good.
What Every First-Time Investor Needs To Know—Dos and Don’ts
Having some useful tips in the back of your mind can make you feel more confident and investing-ready. That’s why this list of do’s and don’ts stand at your service. Heed the advice that experienced investors swear by and you should be ready.
DOs
- Do keep the first investment moderate—A smaller amount will make that first move less scary for you.
- Do grow your investments with time—If you get to like the role of an investor, don’t shy away from making new investments. Of course, keep them reasonable and in line with your strategy.
- Do go with low-risk investments when you diversify your portfolio—Gilts, certificates of deposit (CDs), REITs, and exchange-traded funds (ETFs) are your safety net.
- Do respect the holding period—Think through how long you can live without those funds. Taking out the money before the holding period ends comes with repercussions (for CDs).
DON’Ts
- Don’t rely on individual stocks—Putting all your faith and money into a single company is very risky. You can invest in individual stocks, but make sure that they are a small part of your diversified portfolio.
- Don’t trade too often—If you get carried away with trading, you can reduce your final returns with trading fees.
- Don’t take on a short-term perspective—While the thought of getting your hands on your growing money is tempting, try to restrain yourself and keep them invested for a longer period of time. A long-term perspective comes with a higher gain.
- Don’t try to time the market—Timing the market is practically mission impossible. There are so many changing outside factors, that you can reduce your gains if you try to do so. Instead, stick to your strategy, and go along with your plan despite the volatility.
What Can the Life of an Investor Bring? It Depends on What You Want
Being an investor isn’t a glamorous job reserved for men in suits who aim to buy a yacht. Investing is a common man’s way of earning money. There is no glitter nor fame. What you will find is a variety of choices to grow your funds according to your goals.
The beauty of investing is that it is adaptable. There is something for everyone, and if you think back to different investor personalities you’ll see that it is true.
Should you become an investor? Is this how you picture your future? You don’t need to make that decision right now. That’s yet another benefit. It’s not like you must go all in, or go home. You can make a low-risk, small amount investment and see how it feels. Don’t put pressure on yourself to take on a new role without testing the waters.
Overall, to become an investor you need to know what it takes. Even if you simply plan to earn some extra cash, you want to know the basics and make the right moves. So, take those glorious 7 steps and you’ll learn to walk and talk like an investor in no time.