If you’re new to investing, it’s pretty easy to feel overwhelmed. There are strange words to figure out, complicated ideas to understand, new decisions to make, and plenty of conflicting advice about all of it. Just Property, South Africa’s number one letting agency, have provided a helpful guide for hopeful investors looking to dip their feet into the world of property.
Always start by doing your homework. Take your time and don’t rush into any investment programs.
“The most important aspect of investing is to know yourself – your goals, your preferences and your tolerance for risk. Use your own investment profile as a starting point to research the types of investments that are suitable for you. Start with a small portfolio of three or four funds from different asset classes that can provide you with fairly broad diversification.” advises Paul Stevens, CEO of Just Property.
As your understanding of different asset classes and fund types increases, add to your portfolio according to your investment profile and your long-term strategy. Paul Stevens recommends 3 points to consider before taking the plunge into property investment.
Is this the best use for your money?
The most important factor to consider: Is this the right time for you to invest, and is this the best use of your money?
For example, wouldn’t it make more sense to pay your debt? The money you are spending on the interest of your high credit card debt may be higher than what you might earn when you invest. In this case, it would make sense to pay off a credit card debt that is costing you 20% per year, before investing in mutual funds or stocks where you realistically expect to earn 10% or less.
Also more important, you should protect yourself from the financial catastrophes that could wipe out all your investments, or worse, put you into a big burden of debt when they happen. This can be done by buying insurance before investing.
First of all, make sure that you have adequate health insurance, to protect your money against the high cost of being treated for health problems. A disability insurance is also a good idea because a disability can wipe out your savings very fast.
What is your objective for investing
A factor that determines where to invest your money is your objective for investing.
You may want to hopefully grow your money fast and you do not care if you risk it because you have more time to pick yourself up and recover from a downturn. Or your goal is just to preserve your capital in the safest way because you will need your money soon, and it is important that it does not lose its value.
These different goals are compatible with different kinds of investments or mix of investments, as follows:
It is also possible that you can invest for two different goals, such as investing for a house down payment (short term) and investing to retire (long term).
How should you diversify your funds?
Diversification is another fancy word that investment people like to throw around but all it really means is investing your money in a lot of different things instead of putting all your eggs in one basket.
Diversification is important because it’s the only way to decrease your investment risk without decreasing your expected return. One way to diversify is with your asset allocation. Putting some money into stocks and some into bonds means you’re diversified across different types of investments, you can also diversify within those major categories.
For example, instead of picking just a few local stocks to invest in, you could pick an index fund that invests in the entire stock market. When you own a little bit of every company, no single company can send your investments into the tank.
This kind of simple diversification has the benefit of decreasing your risk of loss without decreasing the return you expect to receive.
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