Building an investment fund can be likened to building your dream home in that there are multiple strategies available. To be successful in this task, you must be ready to go past the basic knowledge. Basically, a sound investment that will last for a long time while still giving you good returns calls for a well-thought design that embodies a combination of several investment vehicles.
While growing the investment fund can be time-consuming, you need to ensure that you have the appropriate mix of investments. Most importantly, you have to be comfortable with the risks.
Start with paying off your debts
Before you start thinking about investing, you need to review your financial profile and ensure you don’t have expensive debts. Normally, some of the unsecured short-term loans will cost you a lot of money. It makes no sense to start investing when you are still paying high-interest rates on your bad credit loan. Similarly, it would be great if you established an emergency fund first to make sure you are safe if the worst happens.
When you eliminate expensive debts, you are certain that your invested funds will earn you a decent return. For instance, having a credit card debt with high-interest rate means that you will be paying more money than you earn. In a nutshell, the returns are nowhere close to the amount you are expected to pay each month.
If you have several credit cards, you can choose to consolidate the outstanding balances on a zero interest card. This implies that every dollar you pay will be used to settle the balance.
Consider the retirement plan backed by your employer
Whether you have enough money or not, you can take advantage of this option to grow your funds. By design, this plan taps into your paycheck and you decide how much goes into the account. Depending on the requirements and rules put in place by the employer, you are at liberty to set a certain percentage of the income to automatically go into the retirement account.
This means you won’t need lots of money to start your investment journey. By adding a certain amount on a regular basis, you can be ready to invest in the vehicles provided by your employer. The most attractive thing about this arrangement is that all your contributions are subject to tax deductions. At the same time, all the earnings from the investment are exempted from tax until you are ready to make withdrawals.
If your employer matches the contributions, you will be getting free dollars by simply contributing to your account. Therefore, you should commit to making the contributions and watch your funds grow.
Focus on dividend reinvestment plans
These are arrangements that help you make small investments in company stocks where you will be getting dividends. Today, a lot of companies offer DRIPS where you can invest in their stocks. You can choose which companies to invest in and you won’t be paying investment fees since you’ll be investing directly.
When you make regular contributions, you can be sure to grow your investment fund. To make things easier, you can automate the deductions from your paycheck. By starting small, you can eventually buy a lot of stocks from a performing company. Normally, the earnings are used to acquire additional stocks and over time, your fund will grow tremendously.
Consider low minimum investment funds
The available ETFs and mutual funds come with set investment minimums. While some of the options will require you to have thousands of dollars in your name, there are still other accounts where you can invest lower amounts. If you can find a fund with a minimum requirement of about $100 you can definitely spread your investment amount across more than one fund to maximize your returns.
To get the appropriate deals, try looking at huge mutual funds and see if they offer options that require a low minimum. However, index funds tend to be a great option since they are known to represent an outstanding play on the markets.
Structure your investments well
In the US, there are two remarkable tax shelters for lower and middle-class investors alike. The 401(K) and the Roth IRA can be lucrative if you are diligent. However, they come with contribution limits, tax benefits, and quite unique regulations.
Basically, a 401(k) plan will help you make investments across several funds and each dollar you invest is exempted from taxation. On the other hand, a Roth IRA will tax your money upfront but your capital gains, interests, and dividends will not be taxed upon your retirement.
Understand your risk tolerance
When you consider making investments, you need to know that there is a conspicuous correlation between returns and underlying risks. Basically, an investment with a higher risk like equity has a potential to give higher returns than you would realize from cash investments. Nevertheless, this doesn’t mean that when you take a high level of risk you will be guaranteed to reap huge returns. If it was, the risk factor wouldn’t be there since you are certain to get returns.
While there are different ways of determining risks, volatility is a reliable approach. This focuses on measuring the degree by which your investment fluctuates within a given period. When measuring your risk tolerance, you need to focus on the time you intend to invest. For instance, if an investor has planned to invest for about 10 years, they have a better capacity to withstand short-term volatility. As such, making a huge investment in equity can be lucrative since there is enough time to recover from initial setbacks. On the other hand, people who can only invest for a short time must focus on less volatile investment vehicles.
At times, investing borrowed money can be a great decision. However, you have to be sure that you’ll get higher returns from the investment. Basically, the earnings should exceed the cost of the loan to ensure that you will be able to pay back the loan.
Never rely on one investment
If your portfolio will grow tremendously, you need to avoid having all your funds in a single stock. If your main target is to invest in blue-chip companies that offer good dividends, you shouldn’t rely on a single company.
If you do your background check, you will easily discover that there are lots of companies which offer similar returns. By having investments spread across multiple industries cushion you from losses that might occur if one firm goes under.
Never overpay for any assets no matter what
Price is the most important factor that determines how much your investment will earn. As a rule of thumb, you should be wary of options where investors’ optimism fluctuates throughout the year.
Basically, there is no way a stock with low yields will give you phenomenal returns. Nevertheless, this may happen if the situation is unique and bound to turn around in a short while. At the same time, you may consider investing in startups with a huge potential for growth.
Always monitor your portfolio
The investment journey seldom ends when you’ve bought the funds. It is your duty to monitor how your portfolio is performing and you should do a review to determine if you are on the right track.
Basically, your asset allocation may start to drift as time goes and some options may need to be reassessed every now and then. Besides a meticulous planning of the asset allocation, you must monitor your portfolio if you want to maximize your earnings.
Contrary to traditional beliefs, investment doesn’t have to be a hard undertaking. With adequate knowledge, you can become a good investor. While there are several investment vehicles available to grow your funds, you need to choose carefully to ensure you get the maximum returns.