Investing is actually pretty simple; you’re basically putting your money to work harder for you so that you don’t have to continually working for income or take on an extra freelance or work overtime hours to increase your take home pay. There are many ways people can invest in, you can learn make money from stock market, bonds, mutual funds, forex that usually don’t require a large sum of money to start.
How to get to financial freedom or grow money fast, you need to understand of the 3 money buckets.
Usually everyone starts with Income bucket ❶ where the income is derived from wages, or extra income earned from doing additional freelance work. Out of the income received, part of it will be used to pay for bills, expenses, loans payments etc.
Next, you can block about 20% of your income and use it for investing purpose. This money should flow into your Investment bucket ❷
At this bucket, depend on your age, objective and investment sum, you can split the investment into two key categories
● for receiving income – this could be stock dividends, share splits, business profit distribution. This investment profits shall flow back to the income bucket to increase your total income pool. The objective is to allow the investment profits be big enough and replace your active income from wages and other work.
● for capital growth – this is the sum invested in the Capital growth bucket ❸. Typical investment in this category such as managed funds or portfolio are meant for capital compounding and growth.
Once your investment in the capital growth bucket reach a certain amount,
● 80% of the amount shall be withdraw for your big ticket financial goals. It could be down payment for a new home, renovation, or you could probably want to start working on paying off all of your debt. Pay off your credit card debt first, then follow by pay off your mortgage.
● Remaining 20% of the capital can be reinvested in your Investment bucket ❷ to build up your monthly profits i.e. your passive income stream.
After this was done, a good investing program would probably build up a series of cash reserves including an emergency cash reserve for you.
Finally, you would then begin to participate in other bigger investment like direct stock purchase plans, acquire real estate, and fund other opportunities.
What kind of investors are you ?
Your choice of investment product, duration of your holding, your time to monitor shall influence what type of investor you are. As different brokerage firm is suited for different investors, so determining your investment style before you start investing is usually a wise decision.
For easy understanding, investment here refers to product that can be easily traded like forex, options, futures, stocks etc.
- Short term Trader
- Traders don’t hold onto investment for a long time. They aim to make quick returns based on short-term market movements and make many trade executions over a short time span. Many people in this category are involves in day trading. If you want to be a trader, then you should look for a broker company with low execution fees, as high trading fees could erode your returns. Also, please take time to gather enough experience first through trading on practice demo account first before investing your real money. Remember active trading takes experience, as the market is unpredictable at time.
2. Long term Buy-and-Hold Investor
- A buy-and-hold investor, or passive investor, is someone who holds onto investments for the long term. The investment theme is capital appreciation i.e. letting their investing positions appreciate over longer periods of time and sell for higher gain a later date. If you see yourself to be a buy-and-hold investor, your main concern should look at monthly holding fees and rather than commissions per trade.
3. Hybrid Investor
- Some investor style falls in between an active trader and a buy-and-hold investor. To fit into this category, some brokers make it easy to set up accounts and provide advice through use of artificial intelligence (AI) or Robo-advisor. The robo-advisor can eliminate human emotions and make the buy or sell decision more systematic. The fee structures is more affordable for the public, with the lower initial investment amount too.
3 stages of your investing success
Stage 1: PREPARE
Know your Finances
Examine your finances, like have some spare cash for emergency first before investing. Just like the income bucket, it should cover your expenses for bills, loans, expenses before jumping into the investment as it takes time to grow.
What is your investing goal like ? How long does it allowed for the investment to grow ? Safety of capital, income and capital appreciation are some factors to consider; are you using the investment to achieve your financial goal like settle off loan, or plan for your retirement ? what is best for you will depend on your age, position in life and personal circumstances.
Identify your Risk Tolerance
Before deciding on which investments are right for you, you need to know how much risk you are willing to take. Your risk tolerance will vary according to your age, income requirements and financial goals too.
Know Your Investing Style
Next is your investing style. Are you a trader or just a buy or hold type investor ? A typical way is to identify if you are conservative , balanced or aggressive investor.
Conservative investors will generally invest 70-80% of their money in low-risk, fixed-income securities such as Treasury bills, with 20% in blue chip equities. A balanced investor, will take 50% on low risk instrument, balance of 30% in medium cap companies, 20% in blue chip equities. On the other hand, aggressive investors will generally invest 80-100% of their money in equities, forex as well..
Stage 2: AIM
Learn some knowledge in investing
Learn the differences between forex, equities, fixed income, mutual funds, ETFs, and fixed deposits. Reading books written by successful investors such as Sir John Templeton, Benjamin Graham, Warren Buffett or others will be good start. You can find some good books at our education section for reading.
Select your Investments
Traditionally most people will select three asset classes: equities, fixed income and cash. But this has totally ignored the largest financial market, i.e. forex. When done properly, forex investing can provide better returns or gains together with your other asset classes. You can invest in forex either trading by yourself, use social trading or use a managed investment companies.
Research the Fees or Costs
It is important to study the costs of investing as it will impact your net investment returns. As a whole, passive investing tend to have lower fees than active investing.
Typically, any investment involves a broker will attract commission charges. Forex or Stock brokers, charge commissions. Mutual funds charges various management fees. If you are starting out with a small investment, get a broker with reduced or low fee.
Stage 3 : FIRE
Find your Broker
The type of broker or company that is right for you depends on the amount of time you are willing to spend on your investments and your risk tolerance. First question to ask is will you be actively or more towards passive investing. There are many brokers to choose from if you want to do active investing or trading, but you need to select a broker who can do robo-advisor or managed account if you like passive investing.
Managed your Emotions
Don’t let fear or greed control your investment decisions. While greed can lead an investor to hold on to a position too long in the hope of higher gain, fear can cause an investor to sell an investment too early or too fast. If your investment keeps you awake in the middle of the , it might be best to re balance your investment, look into your risk tolerance and adopt a more conservative approach.
When you situation changes, like your cash positions improve, you will need to review your investments. It is a good guide to review your portfolio every 3 months if you are active investing, or at least every 6 months if you are passive investing to make sure your investment return stays on track.
Factors to consider when select your broker
Before you can choose a broker, you have to know the difference between what constitutes one. There are regular full services brokers or discount brokers. So, never judge a broker just by the fee, you need to consider more factors.
Reputation and Regulation
First thing first is to ask, which financial authority regulate the broker. This is the most important factor as your safety and segregation of funds are crucial in event the broker goes out of business. You need to have your funds protected and be rightly compensated by the regulatory compensation scheme.
Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation in US or Financial Conduct Authority (FCA) in UK, for example, are regulatory bodies that oversees the broker financial industry and safeguard investor interest.
For forex brokers, there are minimum balances for starting a brokerage account. Typically, this number ranges between $250 to $1,000 with an online broker.
In forex trade, margin can be offered as 1:100 to 1:500, it means that for every 1000 dollar in your trading account, you can trade up to 500,000 dollars (for 1:500 margin)
While you might consider higher margin account, be aware of the interest that your broker may charge when you make a trade on margin. While margin give you leverage to increase your profit, there is also downside risk associate with it you need to know too.
While most brokers have similar fee schedules, some brokers have complex fee structures embedded with hidden fees.
If you see a broker with unusual fee structure, first question you should ask is whether the broker is regulated. If the rates seem too good to be true, be sure to read carefully over your account agreement and fee summaries to spot for any hidden charges.
Does the broker charge fees to make a withdrawal, or they will stop your withdrawal if your balance drop below the minimum? If you have accept trade bonus from the broker, chances are you cannot withdraw your money before hitting the required turnover amount. These are the typical complaints when people cannot proceed with the withdrawal of their investment.
Make sure that you understand the terms and conditions involved in withdrawing money from with your prospective broker.
It is your money, so make sure invest them carefully. At the end of the day, you will need to make a decision to choose a broker to proceed. While your first broker won’t necessarily be your broker for life, you have a much better chance of making money as an investor if you put the right amount of time and research into choosing a broker.
Done correctly over a long career, with the investments managed prudently, you can find it easier to be achieve your desired financial freedom and attaining the status of becoming a millionaire.