How to Ensure You’re Investing Your Money Wisely

October 12, 2021

To invest successfully, you have to understand what you’re doing. Here are some ways to ensure you’re investing your money wisely.

Investing has a lot of power to grow your wealth. The problem is that most people encounter investing through movies and TV, and investing on screen looks quite different than in real life.

And if you make decisions based on misconceptions, you’re not making the right decisions for your money.

Here’s how you can ensure you’re investing your money wisely, whether you’re working with a few hundred dollars or a few thousand.

Know Your Risk Tolerance Before You Start

An investor’s risk tolerance is the amount of loss an individual investor is prepared to handle while making an investing decision. Put another way, it refers to an investor’s willingness to take risks in exchange for rewards.

There are three risk tolerance levels:

  1. Conservative
  2. Moderate
  3. Aggressive

Most new investors are conservative—they don’t take risky investments and prioritize loss prevention over making gains. Because of this, they stick to a small number of asset classes where their wealth is best protected.

Moderate risk investors take some risk, but they’re strategic. They often have a percentage loss they’re willing to swallow in exchange for a reward. Their portfolio is more diverse than conservative investors but is balanced between risky and safe assets.

Aggressive investors are usually those who are well-versed enough in the market that they’re willing to take big risks. That’s because these investors have been around long enough to see swings in the market and know that the market always rebounds eventually, and because of that, they’re willing to go for riskier investments in the name of bigger rewards.

Your risk tolerance is determined by five things:

  1. Goals
  2. Age
  3. Portfolio size
  4. Timeline
  5. Comfort level

The two biggest ones are your timeline and your comfort level, though most investors make decisions on their comfort level first. That said, even if you’re quite comfortable with big risks, if you’re working on a short timeline (as opposed to decades) you have less time to recoup losses, so your portfolio should become more conservative as you near the end of your timeline.

Know Your Investment Budget

You can’t invest money you don’t have. Which means if you’re going to start investing, you have to know your investment budget first—and be realistic about the liquidity available to you.

There are lots of ways to do it, but the simplest option for most people is to use a budgeting tool or app. This could be anything from a broad tool like NerdWallet to an every-last-cent-management tool like Why You Need a Budget. Either way, if you know your money flows, you know how much space you can make in your expenses for investing (and how much you can afford to lose).

Also, keep in mind that any investment amount can help you get started. There are a lot of robo-advisors out there these days, like Acorns, that let you invest a few bucks a month.

Never Invest in What You Don’t Understand

None of us want to lose money on investments. But the number one way to guarantee a loss is to invest in something you don’t understand.

There’s a simple way to think about this: if you can explain it in minute detail to someone else, you know how it works and you’re ready to try investing in it. If not, you’re more likely to get lost and confused.

Take cryptocurrency, for example. It’s become more mainstream these days, but a lot of investors still don’t know how it works. And if you don’t know how it works, you’re going to lose money on pointless mistakes.

Don’t Try to Make Money Fast

Whenever you get impatient, chant this mantra: investing is a marathon, not a sprint. You invest over the course of decades, not months.

So if you come in trying to make money fast, you’re going to be disappointed. In fact, one of the most important deciding factors when you start investing is to look at your timeline. If you need cash within the next few years, investment advisors will often tell you to keep your money out of the market—you’re more likely to lose it there.

Instead, think about your investments as growing a tree from a seed. It takes time, but with diligence and dedication, you’ll have something great at the end.

Don’t Fall Prey to Emotional Investing

If you’ve spent any time at all seeing Wall Street portrayed by Hollywood, it’s always shown to be fast-paced and exciting. However, it’s important to remember that Hollywood makes movies, and boring movies don’t sell.

The problem is that good investing is about as exciting as drying paint.

Remember, this is a marathon. It takes time. Investing advisors will tell you to check your investments every quarter, not every month. That’s how long it takes. If done right, you’ll grow slowly over time.

Similarly, don’t make snap decisions. Investing is a science, and that means taking the time to think it through.

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