7 factors to consider before your first investment

7 factors to consider before your first investment

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 (AP Photo/Nati Harnik)

(AP Photo/Nati Harnik)

Investing might sound like a piece of cake coming from gurus like Warren Buffett or Donald Trump, but in reality there are a few points to consider before making such decisions.

Robert Kiyosaki, one of the world’s greatest financial wizards emphasizes the need to have financial education. According to him, people should not plunge into their first investment without knowing the basics of finance and checking a short list of things one must know before making investment decisions. Being financially independent might come naturally to some people, but others need to master the theory before they put it into practice.

Here are some questions that every person needs to answer before his or her first investment:

What is the purpose of the investment?

For some people, investment is on their business card, but others have other reasons in mind when they consider investing. If you want to use the investment to pay for college or for a down payment on a house, you should know that your investment choices will be different than if you want to use the money for retirement.

Many financial experts believe that a more conservative account would be better if your aim is to use the money in the next five years. However, if you consider that you are covered for the next few years, then investing in stocks and mutual funds could be a good idea.

Do you have a personal financial roadmap?

Before taking up investing, you should analyse your ability to become financially secure. Taking an honest look at your financial situation and figuring out not only your goals, but also your risk tolerance are essential if you wish to start investing.

Understand where you are today, where you want to be and how to do that and take into consideration that there may be a few uncertainties down the road. As soon as you understand whether you are financially fit for such a move or not, you will be ready to make your first investment.

Do you need a financial planner?

This question is strongly related to your financial education and how knowledgeable you are when it comes to investing. In the light of recent events concerning poor financial planning, it is understandable that people have lost the trust they had in professionals who manage investments.

New ImageHowever, looking for a good financial planner might come in handy if you want to hear an expert’s opinion. Remember that he or she should perfectly understand the reasons you have to invest and your goals in order to offer the best options. If you are a rookie when it comes to investing, it is best to be able to count on professional help.

Do you have an emergency fund?

Smart investors have an emergency fund to cover expenses for at least six months, in case anything happens. However, some financial experts believe that it is good to begin with an emergency fund that can help you survive for at least three months. If you are self-employed or your career field is naturally unstable, having enough savings to cover the costs of six months is ideal.

Either way, having an emergency fund before your first investment is essential.

Do you have debts?

Having an emergency fund walks hand in hand with NOT having debts; before you decide to invest, you should pay off high interest credit card debts as quickly as possible. Staying away from debts is a general piece of advice that all financial experts give.

Have you considered a mix of investments?

There is a saying according to which no one should put all eggs in the same basket. As Robert Kiyosaki and other financial gurus recommend, one should not rely on one type of investment.

Moreover, by investing in more than one asset category, you will diminish the risk of losing money and the portfolio’s overall investment returns will run smoother. Asset allocation is relevant also when it comes to meeting your financial goal. No matter what that aim might be, including some risk like stocks or mutual funds will help your investments earn a return large enough to meet your goal.

Do you know you should rebalance your portfolio occasionally?

This is a soft spot even for some financial experts, because opinions differ: while some believe that a portfolio should be rebalanced every six or twelve months, others state that rebalancing should only be done when the relative weight of an asset class does not have a certain percentage.

In short, rebalancing a portfolio means bringing it back to the investor’s original asset allocation mix in order to maintain a comfortable level of risk.

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 Author: Jean Natividad