Investment options for beginners
Beginners in investing are mostly attracted towards stock market investments as these investments deliver high returns, but these investors fail to understand the amount of risk associated with investing in equities. However, stock market investments are a good medium for beginners to get a boost start but they should begin with investing in low risk stocks.Low beta blue chip company stocks are comparatively safer than small and medium cap stocks with high beta.
Low risk takers should give first preference to savings accounts and CD’s as these are fully secure investment options but these offer interest rates that are very low comparative to returns that can be made from stocks and mutual funds.
Mutual funds provide a good platform for beginners in investing as these increase exposure of investment across financial instruments like stocks, bonds and commodities. These are managed by experienced fund managers, who can be relied upon for making sound investments.
How much should you invest now?
It’s really difficult to determine the amount that needs to be invested. A common mistake that people make is that they invest their entire savings expecting higher returns. But this is not the right approach; one should keep aside sufficient savings, so that they do not withdraw investments for an urgent need.
Ideally, one should keep aside ample savings that can support for a year, even if one entirely relies on savings or loses his job. Moreover investments should be made as per individual’s affordability. There is no pint in making high investments and then struggling with daily financial requirement, doing so can add stress to life.
However, the best way to invest is to make systematic investments on monthly basis. This way, one can build a big investment portfolio over 10-15 years, and the monthly payments can be kept within affordable limits so that routine life stays on a smooth track.
When to sell portfolio stocks
Building a stock portfolio requires considerable experience and knowledge as identifying value stocks is not a simple task. But even difficult is to decide on when to sell stocks in order to maximise returns. When money is invested by carefully picking stocks with long term potential then the need to sell stocks may not arise before the projected investment time frame. But stock market investments are not predictable and slump times in the market can even hamper a blue chip stock portfolio, so investors should keep a close watch on bull and bear trends in the market.
If the economic forecast is negative for a couple of quarters then it makes sense to sell high risk stocks from the portfolio, but one can hold on to defensive stocks in such times as these witness maximum buying in troublesome times. However, one should not sell in a falling market when the longer term outlook is positive.
Investing approach based on financial goals
Too often, people jump right in by making huge investments without attaining the required skills to make those investments and also without making investment goals. Investments other than government backed bonds are not always secure and investors can suffer losses with such instruments.
Investments should be based on needs and objectives, there is no point in making wild investment decisions as such decisions often yield unexpected results. So if the objective is to make considerable returns for a secure retirement or buying a home 5-10 years later then one should opt for secure investments such as fixed rate deposits or well diversified mutual funds.
If the financial objective is to make maximum returns on spare money in a short term, then the best approach is to look for high beta stocks. But while investing in high beta stocks, one should be well diversified as such stocks even tumble 90% in falling markets.