This was originally published on Monday, September 18, 2017, in the Pacific Daily News. Click here to subscribe to the PDN.
Q: I am looking to start investing my money other than just in my savings account at my bank. I am not sure where to start or where to invest. Do you have tips for a first-time investor?
Banks and credit unions are a safe risk, but returns aren’t as high as other types of investments. The general rule is the higher the risk, the higher the return. If a return higher than a bank, credit union or financial institution is what you seek, I recommend you first identify your tolerance for risk. That will determine how you invest your hard-earned savings.
Have a plan. Ask yourself a few questions. How much can I invest? Can I afford to lose money? What is my goal? How long do I want to take to reach my goal? What type of investment do I want?
Risk tolerance. The website thebalance.com describes risk tolerance as an investing term relating to the amount of market risk, especially the volatility (ups and downs), an investor can tolerate. Understanding your risk tolerance is an important component in investing. Have a realistic conception of your ability to take a risk. Are you able to handle the loss without panicking and selling at the wrong time?
Taxes. Most people start an investment with a small amount of money and grow it over a period of time. Consider investing in a tax-efficient plan like a pension plan. How much tax you pay upfront or at the end makes a huge difference. Know how your money is going to be taxed when you open up the account.
Diversify. Consider putting your money in different types of plans. Different markets rise and fall and having your money in different types of markets and plans will help balance the losses. Diversification reduces the risk of your portfolio from being completely wiped out by a single event and is the best defense against a financial crisis.
Do your research. The internet and media are full of tips on how to grow your investment faster. Talk to a certified investment counselor at a reputable institution. They will be able to guide you and help your investment grow. Remember the old adage: “If it sounds too good to be true, it probably is.”
Invest regularly. Investing a little here and there can be more beneficial than investing lump sums less frequently. It takes advantage of compound interest. Compound interest is based on the interest made based on the amount invested. The more invested, the more it earns.
Review. Look at your investments quarterly and at the end of the year. Don’t be so quick to move your money around or sell. Most trends need time. If you constantly review your portfolio, you become anxious and do something you may regret later. By evaluating it over time, you can get a sense of how well or poorly your investment behaves. As different funds change, it will affect the overall risk tolerance of your portfolio.
Stick to your plan. Unless your goals change, stick to your plan. If you have concerns, seek guidance from a professional. Know what you are comfortable with. Investing is best when it is easy and stress free.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.