Before you invest
Before you start investing your money in stocks, bonds and the like, you should make sure that your basic finances are in order. Once that’s done, investing doesn’t have to be a mystery, but it should be well planned.
First, define your goals.
This will help you decide what investment vehicles you should use to help achieve your goals. Ask yourself: What do you want to accomplish? When do you want to accomplish this? Be specific when defining your goals—and make sure they’re realistic.
Make sure you have enough liquidity.
Having cash or assets easily converted to cash like share term certificates or savings accounts enables you to meet your commitments like bills and other expenses that may arise. But these types of assets will also help you meet short-term goals that you hope to achieve in the next year such as the purchase of new tires or paying for a weekend getaway.
Establish your time horizon.
How much time you have to meet your goal is called your time horizon. Time horizon influences your investment choices. Short-term goals have short time horizons; you need to be mindful to choose investments that make sense over the short-term. The same is true of intermediate-term and long-term goals.
Understand your risk tolerance.
Risk tolerance is your ability to handle unpredictable results from the investments you make. Investments may go up or down in value. You need to think about how much fluctuation in value you can or want to handle to meet your goals. Longer-term investments like stocks and bonds typically have more fluctuations and risk over time.
To invest well, you must be able to define your goals, afford to invest and understand the time and risk involved in achieving your goals. Once you bring this all together, you will be ready to form an investment plan and take action.