Investing is one of the most fundamental means of meeting life's financial goals. Never underestimate the value of an individual's hard work, but getting their money to work as hard as they do is critical as well. Whether the goal is starting a business, funding an education, retiring, or creating intergenerational wealth, using the financial markets is one of the most effective tools to reach that goal. But where does the average person began the journey? What is the best way to invest?
The short, disappointing answer is 'It depends. There is no right answer, no magic formula, or correct way to invest. A guarantee of success does not exist. But there are some simple tips, tricks, and notes that everyone can use to their advantage.
Why Use a Broker?
With the variety of trading options available through the internet, why would anyone pay for brokerage services? Because they are experts, and they can access even more experts on their behalf. They can answer or get the answers to the questions and strategies that follow. In the big picture, a small brokerage fee is a tiny price to pay for subject matter expertise.
Can a Broker Help Diversify?
Of course, they can - but first, they will help you determine what you mean by diversity. In the old days, it meant simply having a portfolio that was weighted between equities, bonds, and cash, based on the investor's age and risk profile. But there is so much more than that. Yes, the type of investment is important, but the broker can assist with diversifying a portfolio across industries, sectors, regions, and sizes. Let's take a closer look at regional diversity as an example.
Regional diversity has always existed, but the typical American small investor was likely focused on the New York Stock Exchange and specifically gauged their performance against the Dow Jones Average. There's nothing wrong with the Dow Jones, but it is limited, being only one measure of the relative performance of a handful of stocks on a singular stock market. There are equivalent markets around the world, in virtually every major city with their own standard index. And there are thousands of stocks not included in the indexes that offer fantastic investment opportunities. A good broker will help you navigate the various reporting and environmental differences that exist within each region.
Can Investing Make the World a Better Place?
Absolutely! Brokers excel in assisting investors with finding investment opportunities that align with their political, economic, environmental, and social priorities. Exploring ethical investment opportunities also opens the door to more diverse investment options. They expose the investor to more regions, markets, and industries they may not have previously considered. One can support fair trade options, worker rights, minorities, small businesses, animal rights, pharmaceutical development, regional development, environmental protection, or energy production, to name but a few.
What About Risk?
Markets are volatile, and by their inherent nature, risky. The axiom buy low, sell high sounds great in theory, until the realization hits that anyone selling believes they are selling high - the perception of the health of an individual stock, and thus the long-term prospects for the company will vary wildly. Here are a few points on how to mitigate some risk:
But for the long term: Invest in properties that you intend to hold and allow to appreciate in value and provide ongoing dividend income.
Know your risk profile: Some people can handle a 20% swing in asset value and not bat an eye - others will panic if there is any pullback in stock value. Brokers will assist in the determination of your risk, considering age, income, priorities, and risk adversity rating. Answering broker questions honestly will only help the investor in the long run.
Make a plan and stick to it: Setting limits on margins and setting price triggers for buying/selling control the amount of risk exposure for an investor. Don't get greedy! - if you decided you wanted to sell a stock when it hits $50, stick to it. Don't get sucked into holding it longer. Understanding human psychology and actively combatting the fear of missing out is critical to staying the course.
Utilize market index funds: Especially for novice investors, wading into the market and discerning good investment opportunities from the bad can be daunting, perhaps even to the point of preventing action. There are mutual funds available that mimic market indexes, such as the Dow Jones Index, taking the guesswork out of the decision-making process.
What Next?
Passive income is powerful - earning dividends and capital gains while an investor sleeps is a great motivation to get involved in the market. In order to meet your financial and personal goals, using a sound investment plan, diversifying your portfolio, and staying in for the long haul are key to success. Remember, markets may correct from time to time, but they have flourished for over a century, and their success will help investors achieve their desires. When investors understand their own plans, limitations, and desires, combined with the sound advice of a broker, they can realize significant gains.