After making an extra grand per month for awhile, you may find that you have paid off all your debts and have established accounts for larger ticket items like an emergency fund, retirement or college savings, or automobile replacement. But you may find that you still have some money left over in the budget and want to begin investing. The question is: where to start?
Three Questions to Ask Yourself
First, start off by asking about your risk tolerance. Do you have plenty of other funds and can afford to lose some? Would the thought of losing money keep you awake at night? These types of questions can point you toward certain investments. Less risky investments such as CD’s or balanced mutual funds might be appropriate as you near retirement. On the other hand you might want to speculate in commodities or forex.
Risk can sometimes be a manifestation of knowledge and experience. It would be incredibly risky for me to fly a plane since I am not a pilot, but someone with the knowledge and training can fly a plane safely. So the second question should be related to your personal investment experience and knowledge. If you have never invested before, you might be wise to start with less risky investments and gain some knowledge.
You can also begin by trading a demo account. There are many stock and forex websites that offer not only information but the opportunity to practice trading without the risk of losing your hard earned money until you get some needed knowledge and experience.
The third question that I would ask relates to the level of involvement you would like to maintain. Some people would rather allow their investments to operate on auto-pilot using investment managers or index funds or even REITs. This hands-off approach has some advantages in that it allows you more time to enjoy life. However, you still have to be vigilant because too many celebrities have found out that there are those who would take advantage of this type of arrangement.
On the other end of the spectrum are those who prefer to manage their own investments. This can take quite a bit of time, and money can be lost before experience is gained. However, there is no one who is likely to care more for your money than you.
In reality, these three questions are all related. The bottom line is how involved do you want to be in managing your investments and what types of risks are you willing to tolerate. There are varying degrees of risk in each investment as well as risk in managing your own funds or allowing a professional to do so. Just ask clients of Bernie Madoff.