While some may not regard investing as an entrepreneurial need, managing your personal finances in order to fund a future startup or business is. Without financial security, business owners and entrepreneurs can sometimes be at the mercy of outside investors, who may or may not believe in your business plan, growth prospects, or revenue model. To avoid crippling your business because you can’t fund its growth, here is how to start investing today in preparation.
Why You Should Start Now
Starting any new endeavor can be intimidating. This is especially the case if you pay attention to all of the media hype that surrounds the stock market. Over the past several years, since the recession of 2008, the market has seen a great deal of volatility. Yet, even with all of its ups and downs, the market still offers the opportunity for investors to substantially beat inflation, and to achieve financial freedom.
None of this can be done, though, without new and beginning investors overcoming their fears and dipping their toes in the water. If this describes you, much of your fear can be eliminated by simply obtaining a good understanding of how the market works, and having a good solid financial plan to follow.
Reviewing the Average Market Returns
First, in order to truly understand the market, it helps to take a look at its background, along with its historical returns. Going back as far as 1900, the market has returned an average of over 11.50% annually.
This is a significant achievement, considering that during that period of time, there were a number of disastrous events that occurred around the world that could have caused the market to crater. Some these events included World War l, World War ll, The Great Depression, The Vietnam War, The Korean War, and numerous terrorist attacks.
In addition, throughout that period of over 100 years, there were also numerous economic boom and bust cycles. By taking a closer look, this tells us that, rather than simply singling out one or two events, it is better to look at investing as a long-term endeavor. In doing so, the stock market will typically average out a positive return over time.
This also tells us that it is important to remain invested in the market for longer periods. While there are some traders who may say that they can “time the market,” the reality is that this is extremely difficult to accomplish. And, by only focusing on the shorter term, investors can miss out on one of the most powerful financial concepts that there is – compounding.
Start Early and Use the Power of Compounding
Compounding is defined as the process of earned income or interest being reinvested to generate additional earnings. While simple interest can allow your funds to grow, compound interest can allow your funds to grow exponentially.
Compounding can be a key part to your investing returns. And, the earlier you begin, the more you can accumulate over time – even when investing a relatively small amount of principal up front.
Choosing the Right Type of Investment Account
New investors must choose where they will transact their investment business. In the past, there was usually only one way to do this – through a stock broker at a brokerage firm. Today, however, you have many choices for how you will execute your investment transactions.
Investors today can still choose to work with an advisor at a brokerage house, such as TradeKing, Scottrade, E*TRADE, etc. These companies will provide you with the ability to discuss your transactions with an experienced professional. It will also usually cost the most in terms of fees.
With the advanced technology that is available today, many investors are turning to robo-advisors. These online wealth managers offer automated, virtual investment and portfolio management advice. Because there is no live advisor involved, investors can significantly reduce the fees that are charged. A robo-advisor, such as Wealthfront or Betterment, closely tailors their recommendations to investors by asking up-front questions regarding an individual's age, risk tolerance, and financial goals.
Tips for Investing in the Market
Regardless of which way you opt to go in terms of market advice, it will be imperative that you develop an overall market philosophy prior to getting started. This will help to keep you focused on how to narrow down your investment choices.
In setting your overall investment foundation, you will need to keep several key factors in mind. These include:
- Be mindful of your long-term financial goals. Going into any type of investment, you should always “begin with the end in mind.” Knowing ahead of time how much risk you can ideally stomach, as well as the reason behind each investment, you will be better able to pick and choose the vehicles that are right for you.
- Keep your emotions at bay. You must also invest with your plan in mind at all times. This means not allowing yourself to buy or sell out of fear, or based on media hype. One of the biggest reasons that investors end up losing money is when they allow their emotions to drive their decisions. Don't let this happen to you.
- Buy quality. Just like anything else, be sure that when you choose an investment to purchase, you are buying quality. This may require that you do some research on the underlying company – but it can be well worth it when you find a hidden gem.
- Don't move forward if it doesn't make sense. Always make sure that an investment makes sense to you prior to purchasing it. And, don't be afraid to tell your financial advisor “No” if an investment just doesn't feel right.
- Life insurance is not for investing. Some agents or advisors will recommend life insurance as an investment. It's not. Do not buy an indexed life insurance policy as a way to invest in the market. Always keep these two financial tools separate.
The Bottom Line
According to an old Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.” If you haven't started investing in the market yet, then now is the time to do so and to get your foundation built. This will allow you to start taking advantage of compounding your returns as time goes on. Regardless of where you have been in the past, this should be the year that you begin your path to financial freedom through investing.