Some Tips From the Industry Experts for the Aspiring Investors
By: Barron Boon
It is not an easy task to set up an ideal investment portfolio especially if you are a novice in this field. Beginner investors are often faced up with a unique set of challenges to make an entry in this field. Whether you want to create and manage your own investment portfolio or you want to take help from an experienced financial advisor, if you are not familiar with some basic financial concepts and objectives, you cannot expect stable growth system and a strong foundation moving forward.
Following are the 3 most important tips aspiring investors need to keep in mind while setting up their feet in the world of investing:
1. Plan Early For Retirement
The earlier you start planning for retirement the better. This the first objective that all the aspiring investors should keep in mind moving forward.
It makes more sense in the case of the younger investors as they do not have to meet loads of financial obligations. With no spouse, no children, and no or fewer mortgage payments you have an ideal situation to start investing early for the retirement age. Another advantage of starting to invest while young is that you have more cash in hand and a longer time period to invest before your retirement age kicks in. This means that you will have a bigger retirement nest egg by the time you reach that age. Under such circumstances, you can even think about putting some of your money in higher risk – higher return investments.
To fully understand the advantage of planning and investing early for retirement, let us have a look at the following example.
Assume that you are 25 years old now and you have started investing $200/month in a retirement plan that yields 7% annual returns. By the time you are 65 years old, your retirement nest egg will be worth approximately $525,000/-
In case you start 10 years late (when you are 35 years old) and make the same investment, you will only have $244,000/- in your retirement nest egg by the time you are 65 years old.
2. Diversify Your Investments
Do not make the mistake of putting all your eggs in just one basket. Instead, try to make investments in different sectors or instruments. Try to mix a wide variety of investments within your portfolio. Numerous studies reveal that asset allocation is the most important factor affects the volatility and performance of your investment. It is estimated that the returns you enjoy from your investment depend 91% on the asset allocation, 5% on your stock selection, 2% on market timing and 2% on other factors.
The rationale behind diversifying your investments is that a portfolio comprising of different kinds of investments is more likely to enjoy higher yields (on average) and pose a lower risk than investing all your money in one instrument or one sector. This is because the medium and low-risk assets compensate the high-risk assets and the net aggregate returns are higher when compared with the returns from the single asset portfolio. Instead of spending the returns you enjoy from your investment portfolio, you should invest and re-invest them carefully to enjoy even greater returns.
3. Include Dividend Stocks In Your Portfolio
It is observed the most of the younger investors are attracted more towards the “next big thing” stocks and completely disregard the slower-growing stalwarts such as dividend stocks. In order to enjoy a long lasting success, you need to learn how to diversify your portfolio effectively and also include those slower growing dividend stocks.
There are many companies which offer such dividend stocks. You need to look for companies that are not only prospering but also sharing the wealth they earn with their shareholders by paying them huge dividends on regular basis.
The following example is a clear indication how investing in dividend stocks can help your build your wealth slowly but surely.
A person buys 100 shares @ $ 20.00/share each of two different companies. One company pays no dividends while the other pays quarterly dividends with an annual yield of 3%. If both the stocks grow at an average annual rate of 6% and the amount is invested for 30 years, here are the final figures:
- 100 shares of the company that pays no dividends will be worth $11,486.98/-
- 100 shares of the company that pays quarterly dividends and after reinvesting the 3% dividend every year will be worth $ 83353.98/-
It is because by reinvesting the dividends to buy more shares (referred to as compounding), you are able to earn better profits.
It goes without saying that without having a proper understanding of your current financial situation and of various financial principle and concepts; it can be a risky business jumping in this field. You need to have a tight grip on the foundations of responsible investing in order to become successful in this field.