Whether you’re a brand new investor or have years of experience, it’s often wise to review your investments and investment goals to ensure your funds are invested wisely. But how exactly do you do that? Let’s dig in and learn more about what that means and how to make the best decisions for your investments.
Contents
1. Figure Out Which Type of Investor You Are
The first thing to do is figure out your investor type. Some investors don’t mind taking on serious risk for a potentially significant reward. In contrast, others couldn’t bear the thought of losing money and prefer safe, conservative investments, even with a lower return on investment.
Before you start investing real money, it’s wise to figure out which type of investor you are. Sometimes that’s a hands-on approach where you pick every investment yourself. But others prefer to hand off their investment decisions to an expert. Here are some of the most common types of investors:
- DIY Passive Investor: This investor picks their own stocks and funds but mostly leaves things alone with a long-term approach to their portfolio.
- Active Investor: Active investors look to profit from short-term swings in the market. This investment approach requires more time and a higher appetite for risk.
- Robo Advising Investor: Many investors are happy to manage their own money but don’t have the expertise to build a diverse portfolio. A robo advisor is a digital investment product.
- Hands-off Investor: Some people just want their investments to work for them. In this case, you may be a hands-off investor who is best off working with a professional financial advisor for a fee.
If you do decide to work with a financial advisor, it’s important that you choose a fiduciary. Fiduciaries are required to act in your best interest at all times.
2. Determine Your Risk Tolerance
To understand your risk tolerance, think about how you would prepare for a big drop in the markets and how you would respond if it happens.
- Higher Risk Tolerance: If you don’t mind seeing your portfolio tumble in the short-term because you know you’re going to make it back when the market rebounds, you have a higher level of investment risk tolerance.
- Lower Risk Tolerance: If the idea of the stock market diving gives you the same nauseated feeling of going on a mega rollercoaster, you probably have lower risk tolerance.
3. Decide How Much You Want to Invest
For most people, the first place to invest is with a retirement account like a Roth IRA or an employer-sponsored 401(k).
4. Decide What to Invest In
Following are the most common types of investments you will likely encounter and an idea of the risk each entails:
- Cash
- Bonds
- Funds
- Stocks
- Real Estate
- Derivatives
- Commodities
- Alternative Investments
5. Open an Investment Account
Now that you know the basics of what to buy in an investment account, it’s time to open that account so you can get started with your investment plan.
- Choose Your Brokerage
- Open an Account
- Fund Your Account
- Make Your First Investment
Types of Investment Accounts to Know About
- Taxable Brokerage Account
- Employer-Sponsored Retirement Account
- Self-Directed Retirement Account
- Robo Advisor
The Bottom Line
Consider this that sign! Today is a great day to get started with your first investment.