Know these 10 things before you start investing
Did you decide to invest? Congratulations, this is the first step!
Before you start investing, you should be aware of the following points.
1. Your goals
Determine what your long-term goals are and know what you are investing for. In order to stay invested you need endurance and stay motivated. Is your goal to retire with a certain income? Or do you want to buy a home? You should be aware of these goals to keep you going - most investments start to pay off after 10-20 or more years.
2. Time horizon and amount
Before you invest it is important to understand how much money you need to reach your goals and how long it takes. If you want to save EUR 100.000 for a goal and you can save EUR 500 monthly, you will take 17 years. Alternatively if your goal is to have the amount in 10 years, then you need to save EUR 833 per month. These two parameters and how they interrelate should be clear to you. This also defines the amount that you can use to invest.
One of the points that should be clear to you before investing is your willingness to take which exact risk (= your risk profile). This determines which investments are made and which ones are not. As long as you are young and have no responsibilities, your risk appetite should be higher.
4. Asset Classes and returns
Before investing you need to have a grasp of which asset classes exist (such as stocks, bonds, real estate or commodities etc). Other instruments are funds, ETFs or derivatives as asset classes that are a variation of the underlying e.g. stocks. All these asset classes have a risk associated to it. Risk and return are closely linked: the higher the expected return, the higher the risk.
5. Financial Advisor or DIY (Do it yourself)
Do you want to manage your finances or do you want to use the services of a financial advisor? In both cases, you should be aware of all of the above points. When implementing or choosing products such as stocks or funds, it is up to you to decide how you want to proceed. This depends on your personality and how important it is for you take the time and prioritize your investing activity. If control and independence matter a lot to you, it is better for you to invest yourself and acquire knowledge on the topic by signing up for courses, read books, etc. If you do not want to invest the time and you prefer to discuss these issues with a financial advisor, then that certainly is a possibility. In this case you should meet different advisors and choose the most suitable for you.
6. Active vs. passive investing
Actively investing means you choose stocks or you select a fund with the fund manager doing the stock picking. If you choose to passively invest, you invest in index funds or ETFs. This is a prescribed index (you hence invest in a basket of stocks or bonds). Compared to other investment instruments, ETFs investments are easy to maintain. You can build up an ETF portfolio and then hold it it without adjusting it all the time. An active investment strategy requires more monitoring.
Adjustments also require more knowledge: in order to take action e.g. decide whether a stock should be sold or bought. In summary, active investing requires more knowledge and customization of your portfolio.
Active investing requires slightly more costs. If you work with a financial advisor, you pay her or him either directly through a fee or indirectly through commissions.
Active investing through an actively managed fund also costs more fees than a passive ETF. ETFs, unlike actively managed funds, feature an automatism, making it clear when an adjustment is made or not. The fact that it is automated reduces costs. In comparison, ETFs generally perform better than actively managed funds. If you do stock picking it might generate more returns than ETFs, but also requires more time on your part and a concise investment strategy, otherwise you pay more for transaction costs and potentially for losses. Online broker / online bank transaction costs are usually cheaper compared to a traditional broker or bank.
8. Investment strategy
If you are actively selecting stock (stockpicking), then you need to base this on an investment strategy. The strategy will give you a framework to use to select, buy, sell, and deal with fluctuations in the market. If you invest passively, then it is important to create your investment mix based on your risk profile. If you are a conservative investor, your risk profile is usually risk averse: you invest in less risky assets such as equities or ETFs on stocks.
9. Open a custody account
If you want to invest, you need a custody account. You can easily do this through your bank or via an online broker such as the Comdirect, Onvista, DKB. As soon as the account is opened, you need to link it to your checkings account and transfer the investment capital to the custody account. If you do this through your bank or through a financial advisor, they will implement this for you. Once your custody account is up and running and you have money in the account, you can start to buy instruments. If you have a financial advisor she / he will do so for you.
10. Rebalancing and adjustments
Based on your investment strategy and risk profile it is important to regularly check your life situations as this has in impact on your profile.
If nothing changes, you still need to examine your portfolio- does it still match your risk profile and asset allocation?If markets move a lot your % of stocks may not be correct anymore and need rebalancing.
Now you are done! These were the 10 things you should know before you start to invest / the steps you need to go through when you start investing. We explain all the steps in detail in our Investing Bootcamp on our Finelles Academy.
Written by Clara Creitz
Finelles Founder. Coach and Consultant (UBS, Towers Watson).