You are all ready to start investing. If you want to invest in the stock market then you need to formulate a game plan. You game plan will determine whether you are a successful investor or a foolish speculator. The way to keep yourself from losing your hard earned money is by making sure that you have the proper risk vs. reward balance for your portfolio.
Here are 3 things to consider when starting investing.
1) Develop your investment strategy.
You have to figure out for what purpose you are investing. This is the most important question because it pertains to your investment purpose. The purpose of your investment could range from retirement needs, children’s education, purchasing a home, buying an automobile or simply financial independence. Setting goals adds a clear cut direction to your investment strategy. If you have a specific purpose in mind, then you will be much more likely to stick to your plan. Young investors should stick to small and mid cap stocks that could become the next big growth story. Older investors should buy large caps and bonds so that they can protect their capital
2) Figure out the exact return that you are looking to get on your money.
Figure out exactly what kind of return you need to earn in order to meet your goals. The stock market has historically returned 10% annually. These types of returns may not be possible in the future. Warren Buffett expects the market to grow in the single digits over the next few decades. If you think want returns greater than the market average and then you will have to pick your own stocks, If you want returns equal to the market then become an index investor. Buy an index fund. Remember that even the greatest investors find it difficult to beat the market year after year. Your return on your investment should directly relate to the amount of risk that you are willing to take.
3) Figure out how much risk you are willing to take.
It takes risk to make money. Every investment has some level of risk attached to it. Even government bonds face the risk of default by the federal government. Figuring out your risk tolerance will be useful in determining the assets that best fit your particular needs. You always want to take calculated risks and not foolish risks. Investing in an aggressive young company with growth potential could be a solid risk. Loading your portfolio up with junk bonds and distressed assets would be a foolish risk.