Whatever the amount of your investment capital, € 20 or € 200,000, the goal is always the same: to increase it. Depending on the investment you choose and the amount of money you have, the tools you can use will be very different. Learn to invest effectively, it is plausible that you can live thanks to the income from your operations.
Steps
Part 1 of 4: Prepare to Invest
Step 1. Create an emergency fund
If you don't have one yet, it's a good idea to start putting aside enough money to cover expenses over a 3-6 month period by creating an emergency fund. This is not money that you will have to invest, but a sum that must always be readily accessible and safe from market fluctuations. Create it by dividing your monthly savings between two different funds: one dedicated to investments, the other reserved for emergencies.
Whatever your investment plans, do not commit all your savings to the markets without guaranteeing yourself a valid economic safety net; things could go wrong, for example you could lose your job, get injured or get sick, and being caught unprepared for such an event would be irresponsible
Step 2. Pay off any high interest debt
If you have taken out a loan or a credit card with a very high interest rate (over 10%), investing your monthly earnings would be a pointless choice. Whatever the interest rate generated by your investment (usually less than 10%) it would be completely absorbed by that of the debt.
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For example, suppose Simone has saved € 4,000 and wants to invest it, but at the same time he has contracted a debt of € 4,000 through his credit card, at an interest rate of 14%. He could invest his capital and be able to guarantee a profit of 12% (being very optimistic) or an annual income of € 480. However, the company that issued the credit card will have charged him a sum of € 560 relating to interest on the debt. Simone will therefore have a shortfall of € 80 in addition to an outstanding debt of € 4,000. So what is the point of doing so much effort?
384626 02b01 - First, pay off all your high-interest debts in order to really enjoy the gains from your investments. If not, your creditors will be the only ones earning money.
Step 3. Write down your investment goals
As you work on paying off your debts and setting up an emergency fund, think about your reasons for investing. How much money do you want to earn and in what time frame? Your goals will determine how aggressive or conservative your investment strategy should be. If your earning goal is short-term (say 3 years), you will most likely want to opt for a more conservative approach. If you are saving for the long term (30 years) instead, for example for your pension plan, you can decide to be a little more aggressive. In practice, different investors have different objectives and consequently adopt different strategies. Ask yourself the following questions:
- Do you want your money not to lose value and are you therefore looking for an investment that allows you to fight inflation?
- Are you trying to accumulate the money you need to pay the down payment for a new home?
- Do you want to accumulate your savings for retirement years?
- Are you saving to pay for your child's education?
Step 4. Decide whether to avail of the services offered by a financial advisor
A financial consultant is comparable to a sports coach with proven experience, in fact he knows all the schemes and strategies that can be adopted in the field and is able to make valid predictions on the results. Although it is not strictly necessary to use his support to invest, you will soon realize that being joined by a professional who knows the market trends and investment strategies and is able to diversify your portfolio could prove to be the best choice.
- Typically a financial advisor requires a fixed or variable fee of between 1 and 3% of the managed capital. Therefore, if you start investing € 10,000, expect to pay an annual fee of around € 300. Note that the most established financial advisors often only accept clients capable of investing large sums of money: over 100,000, 500,000 or 1 million euros.
- Does the amount required for the consultation seem excessive to you? At first glance this may be true, but you will change your mind as soon as you realize the importance of the advice offered. If your financial advisor required a 2% commission to manage a capital of € 100,000, but helped you make an 8% profit, they would guarantee you a net income of € 6,000. A great deal isn't it?
Part 2 of 4: Mastering the Basic Investment Techniques
Step 1. Understand the basic concept:
the greater the risk, the greater the potential profit. Investors, in fact, require a large profit to take a big risk, similar to bettors. Very low-risk investments, such as bonds or certificates of deposit, usually guarantee a very small return. Commonly the financial instruments that offer the highest returns are the riskiest ones, such as penny stocks or commodities. Put simply, very risky financial products include a high probability of failure and a low plausibility of fabulous gains, while very conservative choices greatly reduce the chances of loss, but mostly promise meager returns.
Step 2. Diversify, diversify, diversify
Your invested capital is constantly at risk of being extinguished due to potential inappropriate choices. Your job is to protect it long enough to take advantage of growth opportunities. A well-diversified portfolio limits your risk exposure, giving the capital enough time to generate real gains. Industry professionals diversify both investment instruments, stocks, bonds, index funds, and related sectors.
Consider diversification in these terms: owning a single share means having to rely entirely on its performance. If its value goes up, you can celebrate, but if it doesn't, you will have no way out. By buying 100 stocks, 10 bonds and 35 commodities instead, your chances of success will increase: if 10 of your stocks lose much of their value or all of your commodities suddenly become waste paper, you will still be able to stay afloat
Step 3. Buy and sell always and only for a clear and concrete reason
Before deciding to invest even a single penny, explain to yourself the reasons for your choice. It is not enough to note that a stock has steadily gained over the past three months to decide to buy it. Otherwise it would be a simple bet and not an investment, based on probabilities and not on a real strategy. The most successful investors always have a theory about the potential success of their investments, no matter how uncertain the future is.
For example, ask yourself why you intend to invest in an index fund like the Dow Jones. Start by asking yourself a simple question, why? Perhaps because you believe that investing in the Dow Jones basically means investing in the good performance of the American economy. Why can you make such a claim? Because the Dow Jones is made up of the 30 best stocks in the United States. Why is this a good thing? Because the American economy is emerging from a period of recession and the major economic indices confirm this scenario
Step 4. Invest in stocks, especially over the long term
There are many who, observing the stock market, see the opportunity for a quick profit. While making a big profit with stocks in a short time is certainly possible, the odds of success are not in their favor. For every investor who makes a large profit by investing in the short term, another 99 quickly lose a large amount of money. Also in this case the choice made will be more like a speculation than an investment. Only time separates speculators from a false move capable of completely eliminating their capital.
- Why is day trading on the stock market not a successful strategy? For two reasons: the unpredictability of the market and brokerage commissions.
- Basically the market, in the short term, is unpredictable. Knowing the daily trend of a stock is almost impossible. Even the strongest and most promising companies face tough days. The winning weapon of long-term investors, compared to those who are dedicated to day-trading, is predictability. Historically, in the long run, stocks tend to generate a gain of around 10%. You can't be sure that you are making 10% daily profit, so why take such a risk?
- Each purchase or sale order involves the payment of commissions and taxes. In simple terms, day traders pay more commissions than investors who patiently let their assets grow. Commissions and taxes add up to your potential profit.
Step 5. Invest in companies and economic sectors that you know
Your chances of success will increase in proportion to your knowledge. Also, always keep in mind the words of the famous American investor Warren Buffet: "… buy shares in companies that are so solid and well organized that they can even be led by an idiot, because sooner or later it will happen". Some of the best-performing companies that can guarantee excellent profits include: Coca Cola, McDonald's and Waste Management.
Step 6. Adopt a hedging strategy
Hedging is a reserve investment plan equivalent to a risk hedging strategy. This is an instrument designed to offset losses through an investment in the opposite scenario to that desired. Investing for and against something at the same time might seem counterproductive, but on reflection you will realize that the natural consequence will be the reduction of risk. Futures and short selling are both valid options for implementing a hedging strategy.
Step 7. Buy low
In whichever instrument you choose to invest, try to buy it when it is "on sale", that is when no one else wants to buy it. For example, in the real estate business, you will want to buy properties at a downturn in the market, when the number of available properties far exceeds that of potential buyers. When people have an urgency to sell, they are more willing to negotiate, especially if you are the only one who has smelled a good deal.
- Given the difficulty in identifying the minimum achievable price of a financial product or asset, an alternative to buying low is to buy at a reasonable price and then resell at a higher price. There is always a reason why a stock is being sold at a "cheap" price, for example quoted at 80% of its peak in the last year. In fact, unlike houses, whose value falls due to a lack of demand, the price of the shares is not as susceptible to the number of buyers and, as a rule, only falls considerably in case of corporate problems.
- However, when the entire market is down, it is possible that the decline in some stocks is simply due to a mass sale. To get a good deal, you'll need to do some in-depth analysis. Focus on those companies whose shares appear undervalued.
Step 8. Overcome the difficulties
By using the more volatile investment tools, you may be tempted to exit the market. When the value of your invested assets plummets, it's easy to panic. However, having carried out the necessary analysis, you should have foreseen what is happening and have already decided how to deal with potential market movements. When your stock falls rapidly, you need to update your research to understand what is happening at the fundamental analysis level. If your study suggests continuing to trust your stocks, keep them in your portfolio, or better yet, buy more at a time when the price is affordable. Conversely, if the fundamentals indicate that the market situation has changed permanently, close your position. Don't forget, though, that when your sale is driven by fear, many will do the same. Exiting the market will therefore mean offering someone else the opportunity to buy at an affordable price.
Step 9. Sell high
If and when the market rises, sell your investment stocks, especially as they are "cyclical stocks". Reinvest your profits in a better valued instrument (buying low of course), trying to minimize your taxable income in order to reinvest your entire profit (rather than having it taxed first).
Part 3 of 4: Invest in Safety
Step 1. Invest in a savings account
Traditionally not viewed as investment tools, deposit accounts can be opened with very little or no initial deposit. They are totally liquid instruments, therefore they allow you to disinvest your money in a completely free way, albeit with some limitations relating to the number of operations that can be executed. They offer a low interest rate (typically lower than inflation) and guarantee predefined earnings. It is not possible to lose money through a deposit account, but in the same way it is not possible to get rich.
Step 2. Open a money market accounts (MMA)
Compared to a deposit account, an MMA requires a higher initial deposit, but allows you to enjoy almost double the interest rate. MMA accounts are also liquid instruments, although there are limitations relating to the number of possible accesses. The interest rates of many MMA accounts are aligned with current market rates.
Step 3. Start saving with a certificate of deposit (CD)
Investors set aside their savings in CDs for several years, commonly 1, 5, 10 or 25, during which time they cannot access the fund. The longer the life of the CD, the higher the interest rate offered. CDs are offered by banks and brokers and although they have a very low risk, they offer limited liquidity. CDs are a useful tool in fighting inflation, especially if you don't intend to invest your savings differently.
- Invest in bonds. A bond is essentially an issue of debt by a government or company, repayable at maturity upon payment of an interest rate. Bonds are considered to be "fixed income" securities, as the profit generated is in no way dependent on market fluctuations. When buying or selling a bond, you will need to know: the value (amount lent), the interest rate and the maturity (the date on which the principal plus interest will be returned to you). The currently safest bonds are those issued by the most economically stable states, for example the US Treasury note or US T-note.
- Here's how bonds work. ABC company issues a five-year bond with a value of € 10,000 and an interest rate of 3%. Investor XYZ buys this bond, thus lending his € 10,000 to ABC company. Normally every six months, ABC company pays investor XYZ an interest of 3%, equal to € 300, to have the privilege of being able to use his money. At the end of the five years and after all interest has been paid, ABC company will return the initial capital to investor XYZ.
Step 4. Invest in stocks
Shares can usually be purchased through a broker; what you buy is a small portion of the ownership of a publicly traded company, which makes it the holder of decision-making power (commonly exercised through voting in the election of the board of directors). Sometimes you may even receive a portion of the profits produced, paid in the form of dividends. There are also dividend reinvestment plans (DRPs) and direct share purchase plans (SDRs) whereby investors buy directly from the company or its agents, bypassing brokers and their fees. These types of plans are offered by over 1,000 large companies. Stock market beginners can invest even small monthly amounts (€ 20-30) in the purchase of fractional shares of a company.
- Are stocks considered a "safe" investment? It depends! By following the investment advice presented in the article and investing long-term in shares issued by solid and well-managed companies, you will be able to achieve a very safe and profitable result. On the contrary, by betting on the purchase and sale of shares throughout the day, your investment can be considered very risky.
- Try investing in mutual funds. Mutual funds are a set of stocks chosen by the company that manages them. Mutual fund management companies are not guaranteed by any public institution, adopt diversification strategies, pay an annual management fee and often require a small initial investment fee.
Step 5. Invest in a pension fund
A pension fund is the most popular form of investment among ordinary people. There are many and different ones, each a guarantee of safety and profit.
- Company pension funds are specially created for the use of employees. They allow you to determine what percentage of your salary to deduct and pay into your account. Sometimes companies contribute to the creation of pension funds by also paying the same amount of money. Your money will be invested in stocks, bonds or a combination of both.
- An Individual Retirement Account (IRA) is a retirement plan that allows you to set aside a monthly share of your income. One of the benefits of an individual retirement account is compound interest. The money you earn from the interest and dividends of your investment will be "reinvested" in your account. This means ever greater interest and dividends, in a continuous cycle. In practice, the money earned from the interests of your investment generates more income. A 20-year-old investing only € 5,000 in his retirement plan at the age of 65 will have a total capital of € 160,000 (assuming a realistic average annual interest rate of 8%).
Part 4 of 4: Investing in High Risk Instruments
Step 1. Consider investing in real estate
There are several factors that make investing in real estate much more risky than others, such as mutual funds. First, the value of properties tends to vary cyclically, and many of those who invest buy when the market reaches its highest levels rather than at a time characterized by an oversupply. Buying when prices are at the peak of the market means finding yourself the owner of an asset that has cost a large amount of money (in property taxes, agency fees, notary, etc.). Furthermore, investing in real estate means blocking a large amount of financial resources, which are difficult to liquidate in a short time. Often the entire sales process could take months, if not years.
- Learn to invest in pre-construction properties.
- Learn to invest in properties that offer purchase incentives
- Learn to renovate old buildings and then resell them (particularly risky business)
Step 2. Invest in real estate mutual funds (REITs)
REITs are similar to mutual funds, but related to real estate. Instead of investing in equity or bond packages, you will invest in real estate funds, sometimes in the form of properties (Equity REITs), sometimes in the form of mortgages or financial derivatives (Mortgage REITs), sometimes in a combination of both (hybrid REITs).
Step 3. Invest in currencies
Investing in forex may not be easy as currencies typically reflect the strength of the economies that use them. The relationship between the general economy and the factors that influence it: the labor market, interest rates, the stock market, and also laws and regulations, are often not linear and tend to change very quickly. Not least, investing in a foreign currency always means betting on the performance of one currency over another, since currencies are traded. This component increases the degree of difficulty of investing in forex.
Step 4. Invest in gold and silver
While owning a small amount of both of these precious metals could prove to be a great way to store your money and protect it from inflation, an overly bullish and not at all diversified choice could cause your capital to go to zero. A simple look at the gold chart from 1900 to today and a comparison with the stock chart of the same period will show that the latter has an almost definable trend, which is not so true in the case of gold and silver. Furthermore, there are many who believe that gold and silver are profitable investments and, unlike normal currency, goods of real value. These precious metals are usually subject to special taxation (which varies from state to state), are easy to keep and very liquid (i.e. bought and sold easily).
Step 5. Invest in commodities.
Commodities, such as oranges and pork belly, allow you to effectively diversify your portfolio, as long as it is large enough. Because? Because commodities do not generate interest, do not pay dividends and, normally, are not devalued by inflation. The fluctuations in the price of commodities can be large and due to seasonal and cyclical factors; predicting them in advance is extremely difficult. Therefore, if you have a capital of only € 25,000, you prefer different instruments, for example stocks, bonds or mutual funds.
