Stocks, bonds, mutual funds, oh my! The world of investments can be confusing, overwhelming, and even a bit scary if you’re starting. The industry has a language all of its own, and it can be challenging knowing where or who to trust for sound education and advice. But still, nothing should prevent you to invest your money in the stock market when feeling ready.
But first…do you research
Don’t think that midlife is too late to start planning a future. This mindset comes from the traditional way of thinking that we retire at 65, stop contributing to our investments, and live off that bucket of money for the rest of our lives. This is now an outdated idea.
However, it’s always better to do your homework and consider the following basic steps before spending your money:
- Define your goals
Investments should be made based solely on your definition of how you want midlife to look for you. This may change over time, but this is your baseline foundation. Before putting any money down, think about how you would cope if your investments fell by 10%, 30% or 50%, then you can set a limit for yourself.
- Determine your risk tolerance
Are you someone who prefers safe, stable investments, or are you someone who doesn’t mind taking risks? Keep in mind, the higher the risk, the higher the reward, and with higher risk, there is also more fluctuation of stock prices. The lower the risk, the lower the reward and less fluctuation. Ideally, you should think about what you can afford to lose. How you divide your money between shares, cash, bonds fixed interest securities or property, is crucial. A common mistake investors make is not diversifying enough. The idea is that if one investment fails you should always have others that will not be suffering, so they can act as a counter-balance.
- Seek financial education
Find reputable sources of stock market education that speak to you in plain language. One of the recent frustrating trends in the professional finance community is the emergence of self-proclaimed “finance influencers” on social media who give out bad advice. Make sure you seek a good one in the industry who have the expertise and credentials to back up what they teach.
Opening a brokerage account
A brokerage account is necessary to facilitate the purchases and sales of stocks. Open one with a firm you can trust. This can be someone you know or someone who is a referral. Or, you can open one on your own without the assistance of an investment advisor. These days, most of the big financial firms have consumer-oriented trading platforms. In both cases, there may be trading commission fees to consider.
Stocks or Mutual Funds?
Investing money in the stock market offers opportunities for improved returns that are likely to exceed any interest rate a high street bank can offer but it’s essential to know the difference between individual stocks and mutual funds.
For example, if you decide to buy stock of a company, you would purchase a specific number of shares of only that organisation. Buying stocks represent ownership in a firm (regardless of how small that ownership is), and you become a shareholder. Mutual funds also represent ownership, but the most significant difference between the two forms of investment is that mutual funds are more like a pool of many different stocks in one fund.
What’s more, while stock prices of individual companies fluctuate and can be bought and sold throughout the day, mutual funds are priced and purchased only at the end of the trading day. Buying a mutual fund spreads your risk among multiple companies and creates more diversification for you, whereas purchasing individual shares of companies keeps your risk in just that one company.
What about Bonds?
Bonds are essentially a loan to a company or government entity, which agrees to pay you back in a certain number of years. In this case, the investor does not receive stock ownership in the company, but they do receive an interest payment. They are less risky than stocks because you know exactly when you’ll be paid back and how much you’ll earn. However, know that, unlike stocks, most bonds aren’t traded publicly, but rather trade over the counter, which means you must use a broker.
Internet and other resources for investing
With the tools available on the Internet, you have no excuse for not researching a potential stock investment. From Bloomberg to Forbes, including MarketWatch and Yahoo Finance there are plenty of resources you can rely on full of information. Look at what they have to say about a company or an investment before you take the plunge.