Understand the Basics to Build a Winning Strategy
Building wealth is so much more than accumulating money for its own sake. When you have a solid wealth-building strategy, you can protect yourself from financial emergencies and ensure a comfortable retirement. Many people don’t understand that to truly build wealth, you need to do more than just save the money you make — you need to develop a long-term investment strategy. Here’s a look at the investing fundamentals you should know.
Start by Understanding Investments
You’ve likely heard this oversimplified financial advice: “Invest!” Investing is essential for maximizing your opportunities to build wealth, but doing so indiscriminately can be counterproductive. When you know about the different types of available investments, you’ll be better equipped to invest wisely. Here’s a quick rundown of the three most common investment types and how they work.
Investing Fundamentals: Stocks
If you’ve begun researching investing fundamentals, you are already familiar with stocks. When you buy a stock, you’re buying a very small ownership stake in a particular business. When the business performs well, the value of the stock goes up. When it performs poorly, the value goes down.
You can buy or sell stocks in companies on stock exchanges, and well-timed sales can lead to profits. For example, if you buy stock in a company when it’s performing poorly, you won’t pay much per share. If you wait until the company starts doing well (and share prices are up), you could sell your shares for significantly more than you paid.
Investing Fundamentals: Bonds
When you invest in bonds, you’re essentially lending money. Bonds are loans made by investors to corporations or government entities. As the corporation or government entity pays back the loan plus interest, the investor makes money.
Investing Fundamentals: Mutual Funds
Mutual funds let you invest in several stocks, bonds, and more at once. These funds are professionally managed. A group of investors pool their money into the mutual fund, and the fund’s manager makes strategic investment decisions in order to earn money for investors.
Which investments are right for you will depend on your goals and financial situation. However, it’s generally wise to create a portfolio of several investment types to minimize risk. This is called diversification, and it’s a cornerstone of savvy investing.
Tips for Beginning Your Investment Journey
Developing an investment plan isn’t (or shouldn’t be) something you do in a few hours or overnight. Once you’ve decided to learn about investing fundamentals and make your own plan, it can be tough to decide where to start. Here are a few suggestions to keep in mind as you design your portfolio:
- Pick Your Priorities: Some investors want to save for retirement, fund their children’s college tuition, or make sure they can leave their loved ones an inheritance — make sure you have a clear understanding of your own financial goals before you start.
- Determine Your Risk Tolerance: Most investors strike a balance between high-yield, risky investments and more modest-yield, lower-risk investments. A financial advisor can help you understand your personal risk tolerance.
- Start With Your Employer-Sponsored Plan: If your employer offers a 401(k) or similar account (and especially if they offer matching contributions), this is a great way to start investing.
- Keep It Diverse: You can dramatically reduce risk by spreading out your investments over many asset classes.
- Take a Long View: Remember that investing is a long-term journey — don’t panic if you don’t immediately start seeing the returns you want.
- Consult With a Financial Advisor: A knowledgeable advisor can look closely at your finances and create a strategy to help you find success. They also can help you better understand investing fundamentals and how to apply them to meet your goals.
Keep in mind that building wealth takes time. That may feel like a challenge if you’re impatient, but it gives you plenty of time to adjust if a particular strategy isn’t working.
What to Ask a Potential Financial Advisor
An experienced financial advisor or investment advisor can offer you indispensable advice. They can also help you truly understand — and apply — the investing fundamentals you need for success.
That being said, you shouldn’t simply choose the first advisor you stumble upon. There are a few key questions you need to ask if you want to make sure you’re choosing the right guide for the journey ahead. Here are some of the questions you might want to ask a potential advisor:
1. What Made You Go into the Field? What Experience Do You Have?
An advisor with a real passion for finance and a track record of success can make a major difference. Ideally, you’ll find someone who has a solid grasp of investing fundamentals (and beyond), a reasonable amount of experience, and a healthy dose of confidence.
2. How Do You Communicate with Clients?
Some investors want frequent and collaborative communication. Others prefer a much more hands-off approach. If you want your relationship with your financial advisor to work, you’ll need to make sure that both of you are on the same page. Consider asking questions like these:
- How often do I meet with you?
- Do you communicate with your clients outside of scheduled appointments?
- If so, how often?
- Do you usually communicate with clients by email? Phone? Text?
In order to make your relationship with your advisor a productive one, it’s important to have a mutual understanding of the style and frequency of communication going forward.
3. What Type of Clients Do You Typically Work With?
You want your financial advisor to help you apply investing fundamentals, but you also want to make sure they have experience working with people whose financial situation is similar to yours. For instance, if you have an average income and just need to develop a strategy for saving for retirement, you might not want to work with an advisor whose other clients are all ultra-high-net-worth individuals.
4. What Is Your Fee Structure?
Financial advisors can be incredibly helpful, but if yours has extremely high fees, the relationship is an impractical one. Before entering into an agreement, make sure that you understand the total cost.
Some advisors charge a flat fee, some make commissions, and some are paid through a mix of both. When deciding whether a given advisor is affordable, don’t forget to account for the money you will be putting into the investments themselves.
Common Investing Pitfalls to Avoid
Understanding investing fundamentals is an outstanding way to begin your journey to wealth. However, it can also be helpful to know which bad habits to look for. These habits might be making it harder for you to build wealth:
- Having Too Much Debt: Debt can add up quickly, and both interest and monthly payments can undercut your financial efforts — do your best to pay down debt as soon as possible.
- Not Saving Enough: If you overspend, saving and investing gets a lot harder — look closely at your budget and cut down on unnecessary expenses.
- Being Too Risk-Averse: It’s understandable to not want to risk your hard-earned money, but if you aren’t seeing much in the way of returns on your investments, it might be wise to take on a little more risk.
Learn Investing Fundamentals to Start Your Wealth-Building Journey Today
Plenty of people become overwhelmed when dealing with the nuances of building a better financial future. However, when you have a solid grasp of some of the key investing fundamentals, you can proceed with confidence. With the help and guidance of a skilled financial advisor, you’ll be poised to achieve all of your financial goals.
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