Learn the Fundamentals to Develop a Comprehensive Approach
Effective financial planning and management can play a role in wealth building. A solid wealth-building strategy can help you prepare for potential financial emergencies and work towards a comfortable retirement. Many people don’t understand that to truly build wealth, you need to do more than just save the money you make — you need to develop a long-term investment strategy. Here’s a look at the investing fundamentals you should know.
Start by Understanding Investments
You’ve likely heard this oversimplified financial advice: “Invest!” Investing can be a tool for building wealth, but it’s important to approach it with a strategic and informed mindset. When you understand the different types of available investments, you’ll have more knowledge to make informed investment decisions. Here’s a quick rundown of the three most common investment types and how they work.
Investing Fundamentals: Stocks
If you’ve begun researching investing fundamentals, you are already familiar with stocks. When you buy a stock, you’re buying a very small ownership stake in a particular business. When the business performs well, it may potentially influence the value of the stock. When it performs poorly, the value goes down.
You can buy or sell stocks in companies on stock exchanges, and strategic sales can potentially lead to profits. For example, if you buy stock in a company when it’s performing poorly, you won’t pay much per share. If the company starts doing well (and share prices are up), you may have the opportunity to sell your shares for a higher price than you paid.
Investing Fundamentals: Bonds
When you invest in bonds, you’re essentially lending money. Bonds are loans made by investors to corporations or government entities. As the corporation or government entity pays back the loan plus interest, the investor makes money.
Investing Fundamentals: Mutual Funds
Mutual funds let you invest in several stocks, bonds, and more at once. These funds are managed by a team of experienced professionals. A group of investors pool their money into the mutual fund, and the fund’s manager makes strategic investment decisions to earn money for investors.
Which investments are right for you will depend on your goals and financial situation. However, it’s generally wise to create a portfolio of several investment types to reduce risk. This is called diversification, and it’s a cornerstone of savvy investing.
Tips for Beginning Your Investment Journey
Developing an investment plan isn’t (or shouldn’t be) something you do in a few hours or overnight. Once you’ve decided to learn about investing fundamentals and make your plan, it can be tough to decide where to start. Here are a few suggestions to keep in mind as you design your portfolio:
- Pick Your Priorities: Some investors want to save for retirement, fund their children’s college tuition, or make sure they can leave their loved ones an inheritance — make sure you have a clear understanding of your own financial goals before you start.
- Determine Your Risk Tolerance: Most investors strike a balance between high-yield, risky investments and more modest-yield, lower-risk investments. A financial advisor can help you understand your personal risk tolerance.
- Start With Your Employer-Sponsored Plan: If your employer offers a 401(k) or similar account (and especially if they offer matching contributions), this is a great way to start investing.
- Keep It Diverse: Spreading out your investments over many asset classes can potentially help to manage risk.
- Take a Long View: Remember that investing is a long-term journey — don’t panic if you don’t immediately start seeing the returns you want.
- Consult With a Financial Advisor: A knowledgeable advisor can analyze your finances and develop a strategy tailored to your financial situation. They also can help you better understand investing fundamentals and how to apply them to meet your goals.
Keep in mind that building wealth takes time. That may feel like a challenge if you’re impatient, but it gives you plenty of time to adjust if a particular strategy isn’t working.
What to Ask a Potential Financial Advisor
An experienced financial advisor or investment advisor can offer you valuable advice. They can also help you truly understand — and apply — the investing fundamentals you need for success.
That being said, you shouldn’t simply choose the first advisor you stumble upon. There are a few key questions you need to ask if you want to make sure you’re choosing the right guide for the journey ahead. Here are some of the questions you might want to ask a potential advisor:
1. What Made You Go into the Field? What Experience Do You Have?
An advisor with a strong interest in finance and a history of successful outcomes may offer valuable insights for financial planning. Ideally, you’ll find someone who has a solid grasp of investing fundamentals (and beyond), a reasonable amount of experience, and a healthy dose of confidence.
2. How Do You Communicate with Clients?
Some investors want frequent and collaborative communication. Others prefer a much more hands-off approach. If you want your relationship with your financial advisor to work, you’ll need to make sure that both of you are on the same page. Consider asking questions like these:
- How often do I meet with you?
- Do you communicate with your clients outside of scheduled appointments?
- If so, how often?
- Do you usually communicate with clients by email? Phone? Text?
To make your relationship with your advisor a productive one, it’s important to have a mutual understanding of the style and frequency of communication going forward.
3. What Type of Clients Do You Typically Work With?
You want your financial advisor to help you apply investing fundamentals, but you also want to make sure they have experience working with people whose financial situation is similar to yours. For instance, if you have an average income and just need to develop a strategy for saving for retirement, you might not want to work with an advisor whose other clients are all ultra-high-net-worth individuals.
4. What Is Your Fee Structure?
Financial advisors can be incredibly helpful, but if yours has extremely high fees, the relationship is an impractical one. Before entering into an agreement, make sure that you understand the total cost.
Some advisors charge a flat fee, some make commissions, and some are paid through a mix of both. When deciding whether a given advisor is affordable, don’t forget to account for the money you will be putting into the investments themselves.
Strategies to Consider in Your Investment Approach
Understanding investing fundamentals is a crucial step toward financial knowledge and growth. However, it can also be helpful to know which bad habits to look for. These habits might be making it harder for you to build wealth:
- Having Too Much Debt: Debt can add up quickly, and both interest and monthly payments can undercut your financial efforts — do your best to pay down debt as soon as possible.
- Not Saving Enough: If you overspend, saving and investing gets a lot harder — look closely at your budget and cut down on unnecessary expenses.
- Being Too Risk-Averse: It’s important to consider the potential risks of not investing, and while it’s possible to see significant returns on your investments, it’s also important to understand that different investment strategies may have varying levels of risk and potential returns.
Learn Investing Fundamentals to Start Your Wealth-Building Journey Today
Plenty of people become overwhelmed when dealing with the nuances of building a better financial future. However, when you have a solid grasp of some of the key investing fundamentals, you can make informed decisions. With the help and guidance of a skilled financial advisor, you can work towards developing a plan to work towards your financial goals.
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