Now that you have a beginner’s guide to investing, the question remains: How do you know if you’re ready to invest?
Have you read headlines about the bull market and wondered “Is now the time to jump into investing with both feet?” While it’s true that placing your bets on a strong market can be the path to fast cash, the hope of great rewards also involves risk. Here are four questions concerning your financial past, present, and future to help you gauge whether you’re ready to invest.
Have you eliminated costly debt?
Financial counselor Andi Wrenn says the most common financial error she sees among her clients is seeking investment advice before they have addressed typical money “must haves,” including a solid understanding of their budget and debts.
“I often see clients who are paying high interest rates on debts, have too high a debt to income ratio, or have no savings. It is great to invest in your retirement, at least a small percentage from the beginning of work, but it doesn’t make sense financially to be paying a debt at 11-21 percent when your investments are earning 4 to 7 percent,” says Wrenn.
Can you afford to lose?
Nope–not if you don’t have at least six months of your monthly income stashed and secure in a rainy day account. Certified financial planner Henk Pieters of Investus Financial Planning says that people commonly underestimate life’s uncertainties and discount the need to have cash available for events like unemployment, illness, disability, and family emergencies. In fact, if you have any concerns about job security, or own your own business, he recommends having at least twelve months worth of your income saved before placing your bets on the market.
Do you have a general understanding of the stock market?
You may know the meaning behind terms “bull” and “bear” market—but do you know how to spot a potentially high-yielding stock from one that is overpriced? Before diving headfirst into the market based on media frenzy alone, Wrenn suggests taking time to learn the basics of investing and the different tools you can leverage to do so, including mutual funds, ETFs, securities, bonds, treasuries–and what they entail in regard to other market conditions.
Start reading credible media outlets like The Wall Street Journal and Barron’s daily to familiarize yourself with expert analyses of the market and how it is impacted by the macro-economy. You will be surprised at how quickly you’ll start to understand critical investment terminology, like options, moving averages, market capitalization, spread, and price-to-earnings ratio. Though stock analysts make a living tracking and predicting the movement behind securities, spotting the real winners in the stock market often rests on spotting a good stock pick—before it hits the headlines.
Can you can commit for the long haul?
Stocks provide an average nine percent yield over the long term, giving them more promise than other investments in building wealth–including real estate. But, to realize those kinds of yields, you need to be able to stomach the fluctuations of the market and commit for the long haul. Though there are day traders who have scored major profits with rapid trading (and some online brokerage houses allow you to execute trades for about $8), it’s unlikely that you’ll be able to react to constantly changing market conditions–or that your trade will be placed at the exact time of day and price you want–as a novice investor.
For this reason, it’s important to stay committed for the long haul when it comes to investing. Be prepared to ride the ups and downs of the market in order to get the best return on your investment.