By Ed Lopez, Head of ETF Product, VanEck Global
Investing is a key component to generating wealth and empowering yourself to create an independent income stream. However, no two investors have the same journey. Each investor’s journey is driven by the different perspectives, goals and solutions they are striving to achieve.
One recurring theme that does ring true for all investors? We all have to start somewhere.
Plan, self-educate and coordinate. We break down 5 takeaways from Financial Literacy Month that every pre-investor can put into action in order to place themselves on the right path.
1. Make a Financial Road Map
What does the saying, “money is personal,” really mean? For many investors, this part of the process shines a light on how money and your personal life intersect. Identifying what your long and short-term goals are in your personal life will ultimately create clarity as to what your investment goals will be. Similar to how you navigate with a GPS, you want your financial road map to have the zoom-in/zoom-out feature. Determine what your long-term goals are, as well as your more immediate and short-term goals and envision some of the ways you would like investing to help you meet these goals. Pinpointing potential roadblocks that could impede you from reaching your goals is also important. See if there is a way to proactively solve for an issue, before it becomes a problem. As CEO and Founder of Bone Fide Wealth, Doug Boneparth says, “you need to earn the right to invest” and part of earning that right is making sure you have a responsible and realistic plan in place. Be mindful to things such as expenses and cash flow. Know how much you have coming in and how much you have going out. Debt, large upcoming purchases and lack of savings are a few other examples of possible roadblocks to be cognizant of. In the world of financial planning, all roads are made of the same material—cash. In order to begin investing one must first ensure they are in strong financial health with a comfortable amount of savings set aside. Lastly, establish an ETA. Akin to taking a long road trip and visiting iconic landmarks along the way, it’s important to identify what the milestones will be throughout your investment journey and to celebrate them. This will help keep you actively involved in the navigation process as well as keep you on track with your timeline.
2. Self-Educate: Familiarize Yourself with Different Investment Vehicles
You don’t need to be an expert in finance or economics to begin investing. However, having a basic understanding and being aware of the different investment vehicles at your disposal is important and can have a significant impact on the strategies you choose or choose not to deploy within your portfolio. Not all investment options are created equal. It’s important to make sure that your vehicle aligns with your goals. For example, if you are at the beginning of your investment journey and looking to slowly acclimate, you may want to begin with an investment vehicle that, categorically, tends to carry a lower risk profile such as a mutual fund or ETF, as opposed to an individual stock.
Part of familiarizing yourself with various investment vehicles is also knowing how to evaluate them and trading best practices. Similarly, purchasing a home is an important decision that comes down to several factors. Prospective homeowners want to be aware of possible unforeseen issues to try and avoid hidden costs. So what do they do? They conduct an inspection. This type of logic also applies to investing. Details such as total return, expense ratio and performance can be costly factors that have the potential to eat into your overall return, and are important to review.
3. Pick Your Mix and Diversify
In investor jargon, “diversification” is the perfect synonym for “Don’t put all of your eggs in one basket.” The takeaway is the same and is particularly true for investors who are just starting out. Concentrating your investments in one type of investment or segment of the market can inherently boost your risk profile. Think of the market as a living and breathing thing—much like the weather. While it may be 70 degrees and sunny in one area of the country, it could very well be 55 degrees and rainy in other areas. The market is just the same. Therefore, it behooves investors to spread their money throughout different areas of the market. Individual sectors and asset classes can suffer from severe declines. However, the likelihood that other segments with completely different construction, exposure and indices will simultaneously experience significant declines is typically much less. Put simply, the main objective of diversification is to create balance. When one asset class is underperforming, your investments in differing asset classes have the opportunity to buffer potential loss.
4. Identify Your Risk Tolerance
Understanding your risk tolerance is where all of the puzzle pieces come together. The level of risk each investor is comfortable with taking is different. There’s both a psychological component and a longevity component. As you learn about different types of asset classes consider how you feel or might respond to changes in values of your investment. Once you have familiarized yourself with different asset classes and investment vehicles, it’s important for you to categorize these different approaches into what you feel are “more risky” and “less risky”. For example, individual company stocks are typically put into the “more risky” category while Treasury Bills are commonly labeled “less risky”, due to the fact that they’re backed by the government. The other risk tolerance component of longevity goes back to your financial road map. What are your short-term and long-term goals and how long do you anticipate it will take you to reach them? Is your plan to keep your money invested for the next 3-5 years, or are you planning on being invested for the next 20-30 years? This is an important distinction to make when determining your risk threshold, as it helps investors to calculate for potential volatility and take into account an appropriate amount of time for investments to rebound from losses.
How to Get Started
5. Open a Brokerage Account
The final step is to break ground and put your plan into action. If you are not already familiar, opening a brokerage account will give you access to technology that will enable you to conduct research on potential investment options, place your trades and eventually, track the progress and performance of your portfolio. There are several different brokerages you can choose from. If you do not already have a particular brokerage in mind, a Google search can be very helpful. Technology has made opening a brokerage account relatively easy and mirrors much of the process of opening a bank account. After you have determined your preferred brokerage, you will have the option of opening an account through the brokerage’s website or in person at a branch location nearest to you.
Once your account has been opened, you can activate it by depositing money, in order to conduct your first trade. By connecting your bank account to your brokerage account, fund transfers can be made very easily and provides you with the freedom to transfer money on an as needed or automated basis. Each brokerage is equipped with a highly sophisticated customer service team who is there to answer any questions or concerns you may have about the logistics of your account.
Ready, Set, Invest!
Investing doesn’t need to be complicated and you don’t need to be an expert in order to start. What you do need however, is to have a purpose. Defining what you are looking to achieve by investing will not only give you a sense of control, it will give you a sense of empowerment. We at VanEck are striving to humanize investing, by providing our investors with unconventional resources, made to simplify and streamline the process.
Interested in what it means to be a “trendy investor”? Tune into our weekly podcast, Trends With Benefits— a podcast about investing, work and life.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Diversification does not assure a profit nor protect against loss.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.