Want To Invest? 3 Critical Things You Should Know Before You Put Your Money To "Work"

Elaine King

Are you ready to invest in the stock market?

Whether you have $1000 or $1M to invest, there are a few simple rules that you should follow before going wild on the stock market. 

If you don’t follow these rules, your investment experience could easily go on a downward spiral, leaving you in a bad position. So, what do you need to know?

1. Invest in Your Passion and What You Know

Do you know about the risks and possible gains involved in the medical sector? Or perhaps you’ve noticed news stories about green energy? But, before investing in these sectors, you should be familiar with the current trends and possible risks in these sectors. 

A robust understanding of the sectors and areas you want to invest in will help you assess the possible gains and risks you obtain through your investments. 

One way to invest in areas you know about while also helping the world is through impact investing. Through impact investing, you contribute to environmental change, support social and corporate change, and more, all while also growing your wealth. Impact investment involves investing in your passion or something close to your heart. For example, if you’re passionate about education, you could invest in new education technologies. Or, if you’re passionate about the environment, you could invest in green energy technology.  

2. Diversify Your Portfolio

While some stocks soar, others may plummet. Even out your risks by purchasing a variety of stocks.  For example, some experts recommend that to be truly diversified, you need at least 100 stocks. Another option might be to purchase a fund. 

As Keynes said in the 1930s: “Markets can stay irrational longer than you can stay solvent.” In other words, markets don’t always behave as we expect them to. 

So, for this reason, it’s best to purchase stocks across a variety of sectors and industries. That way, if one area doesn’t perform well, it may be evened out by better performance in another area. 

3. Know What Money to Invest

One question people often ask is how much money they should invest in the stock market. The answer to that question depends on how much cash you have available and how you plan to use it. For investing, you should only invest money you don’t expect to use in the next few years. 

For example, let’s imagine you are saving money for a down payment on a house. You plan to purchase a house in about two years. So, it’s best you save that money in a savings account so that it will be easily accessible when you need it for the down payment.

However, let’s imagine you want to save money for your retirement. You are 40 years old now and you plan to retire at age 65. In addition to your retirement account, you want to save some additional money. Because you won’t need this money for about 25 years, this is money that you could consider investing in the stock market to potentially obtain better returns. 

Create an Investment Policy Statement

In addition to following the above three rules, you should also create an investment policy statement with your investment professional. 

This policy statement will help you outline what you’re comfortable with or the rules for play with your investment professional. For example, the statement will identify:

  • The level of risk you’re comfortable with (low risk, medium risk, high risk)
  • How much you will invest
  • Your annual loss tolerance limit
  • Your return goals (usually a percentage, for example 6%)
  • The responsibilities of your financial advisor
  • Portfolio guidelines (fixed vs. stock assets)

With these rules and your investment policy statement, you can be on your way to making sound investments toward a brighter future! 

Do you need help making wise investments for your future? Contact Elaine, an expert financial advisor with 20 years of experience, for an appointment to discuss your investment plan. 

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Elaine King - Family and Money Matters™ 2021