A Beginner’s Guide to Investments

Most of my friends and relatives share a common misconception about how investments are not for regular people, and the time has come to debunk this harmful myth. If I were to give a one-minute summary of this article, I would single out these basic rules: learn how to amass a capital cushion, understand how to set financial goals and manage your money, learn how to keep your expenses under control, and learn how to make everyday savings a habit. That’s basically all you want to know to get going and be prepared for action on a larger scale. If you feel the need for more explanations – dive right in!

Rule 1. Set goals

The goal should be specific and measurable. For example, it is very important what currency your investment goal is measured in. If the purchase is planned in a few years, you need to choose the appropriate investments. You should calculate the exact amount of your purchases so that you know when you will be able to accumulate the necessary amount and choose the right investment instruments.

Be sure to check your goals against reality, because if you set a goal to grow your income a hundred-fold in six months, you’re probably being too optimistic.

Rule 2. Know Your Investor Profile

Knowing your investor profile is a principle that should be applied before you start investing. In other words, it’s your risk appetite. Everyone is different, some people don’t even buy lottery tickets because they cannot risk even a small amount of money, while others can easily handle $10,000 jumps.

For me, the risk is a matter of deliberate and cold calculations. I see investments not as a risk, but a conscious approach, and confidence in my abilities. Each risk profile has its own investment options and financial instruments to choose from. For those who are not ready for risk, highly liquid financial instruments like government bonds are available.

Rule 3: Have an Investment Plan

Every business needs a plan. So it is in finance – especially in personal finance. Once you’ve set your goals, you must proceed to your plan. In fact, an investment plan is the path you have to take in order to arrive at your financial goals. This includes the choice of instruments, your investor profile, and the calculation of the amount of investment you intend to make.

The stages of an investment plan are the stepping stones to your financial goals. Your investment plan should include specific amounts you plan to invest, as well as a breakdown of low-risk, high-risk, and medium-risk investments. Also, your plan should include goals you will accomplish in a year and those you want to achieve in 20 or 30 years (children’s schooling, moving to a bigger house, retirement).

Take your investment plan as seriously as possible. Discuss it with your spouse, have family councils to review and update it. Working as a team on something as complicated as an investment is much more reliable, and making decisions together will bring you closer.

Rule 4. Choose the Right Tools

You need to start with basic investments, and it is not necessarily a traditional bank deposit. Government bonds, for instance, are more reliable than stocks or corporate bonds, but also more profitable than a regular deposit. Government bonds in the US are otherwise known as Treasury Bonds. In terms of reliability, your second best choice is corporate bonds, especially those of state corporations.

You also have to learn how to use technical and fundamental analysis. Fundamental analysis, in simple terms, is the evaluation of a company based on its news and reports. If a company is planning to cut five thousand employees in order to reduce its payouts, we must assume it is not worth investing in.

Rule 5: Have a Capital Cushion

Having a capital cushion is the key principle of investing. Without one, you can’t talk about any investment seriously. How many stories we hear and see about distressed investors who use their last money in some financial instruments that are good for nothing? This approach to personal finance is only possible because of a lack of financial literacy – but it’s also because they invest without the said cushion.

Investment returns are not a prize you get once in a lifetime and live happily ever after – investing is also a job. Don’t believe the pretty pictures, investments have to be figured out and worked on, especially if you start from scratch. And only then, when the capital starts working for you (not by itself, but with your involvement), you can breathe out and realize that your efforts were not in vain.