The aim of investing is simple: you buy assets that you think will deliver a profit in the future. But choosing the right asset is difficult, and there are lots of factors to consider, such as how risky it is and how long it takes to see returns.
To invest with confidence, you need to understand the different characteristics of each asset. You also need to know yourself to figure out which investments suit you. What are your goals? What’s your appetite for risk? And how much money are you willing to allocate?
- There are various asset classes you can invest in. It’s important to learn the different risk/return relationship between each of them.
- Understand your own goals, risk tolerance and investor personality to help make the right choice.
- Be honest about your own financial situation to help determine how much to invest, and how long to hold.
Understanding the different asset classes
Knowing the different assets out there will help you make a better investment decision. For example, on BUX Zero, we offer stocks, cryptos and ETFs.
When you purchase a stock, you are buying a ‘share’ of ownership in the company. If you become a shareholder, you are often given the right to vote at general meetings, and you may receive dividends (a percentage of the company’s profits). Dividends, however, are not guaranteed.
Stocks are generally considered to be volatile assets, which means their price can fluctuate a lot in a short period of time. They are therefore assets with a considerable level of risk. If you choose to invest in stocks, you might see large returns, but be prepared for the possibility of losing some of your initial deposit. A good way to lower your risk is to diversify your portfolio by investing in different sectors and other asset classes.
Before investing in stocks:
- Check the fundamentals of the company, like revenue, profit and growth expectations i.e. its financial health.
- Check the size and value of the company via its market capitalization (the market cap is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share).
- Take a look at the past performance of the stock using charts to see how it trends over time.
And exchange-traded funds (ETFs) is a basket of assets, collected into one simple investment product. ETFs often mirror a larger index, such as the S&P 500 in the US or the DAX 30 in Germany. They are easily traded on a stock exchange, allowing you to invest a small amount of money into tens, hundreds or even thousands of underlying assets, often with low fees. ETFs are popular among long-term investors as they tend to provide exposure to broader market movements and build compound interest over time.
ETFs therefore allow you to build a diverse portfolio made up of different asset classes: stocks, bonds, commodities, currencies etc. And you can invest with a very small starting amount. In addition, ETFs are often transparent and accessible as they are required to publish their positions and prices on a daily basis.
If you decide to get into ETFs, you must first determine your risk tolerance and choose how to allocate your assets into the different baskets. Here are some examples:
You could choose the Lyxor All-World Index ETF which tracks thousands of stocks across 23 countries, designed to represent the entire world economy. Or perhaps you’d rather invest in a socially responsible ETF? Check out the UBS USA Socially Responsible ETF. And if you’re looking for companies that offer the best dividends, you could try the iShares EU Dividend, among others.
Of course, like any asset, ETFs involve risks. There might be a tracking error linked to technical problems, for example. Or the fund that runs the ETF might close down.
You can also invest in:
- Commodities (or raw materials). These include gold, which is considered a safe haven in the event of a crisis. Or oil, which relies heavily on demand and geopolitical rivalries.
- Currency pairs (like euro / US dollar or yen / British pound). The currency market is called Forex and can be quite volatile.
- Cryptocurrencies, which are speculative assets in an emerging decentralized world. You can also invest in cryptos in BUX Zero.
- Bonds, which are issued by governments or companies. Their level of risk and return are generally low.
Define your investor profile
Now that you know the difference between asset classes, it’s time to do some self-analysis to help make the right choices.
Adventurous or cautious?
If you manage your stress well and accept the possibility of losing your initial investment, then you can turn to riskier investments in volatile assets, like stocks or cryptocurrencies. You just have to be prepared to take a loss in the bad years, without panicking.
If you are more risk-averse, you can focus on less risky options with a long-term goal, such as diversified ETFs.
Are you in a hurry or patient?
Investing is like climbing a mountain. You can run up the mountain, taking big risks with the potential of falling down. Or you can climb slowly, taking your time with a steady and safer pace.
A good way to figure this out is to estimate your financial needs for the next 10, 20, 30 or 40 years to make sure you don’t put yourself in an uncomfortable position. For example, building up capital slowly for retirement is a very different strategy to, say, investing for a house deposit or your children’s education. And that’s a very different strategy to, say, financing immediate projects where you need to unlock capital quickly.
In all cases, it’s a good idea to set up an investment schedule with certain checkpoints and goals in mind. Remember that investing early with a long-term perspective allows you to grow your money through returns (capital gains and dividends) and the phenomenal power of compound interest.
Choosing how much to invest
So, you’ve figured out the different asset classes and decided your investor profile. The last step is choosing how much to invest and setting a regular Savings Plan. This helps you avoid making risky decisions. On BUX Zero, for example, you can automate your monthly deposits to spread your investments over time.
Analyze your financial situation
Understanding your current financial situation and your broader net worth can help you figure out how much to invest each month.
First, from your monthly income, you can already estimate how much you could invest each month, and how much you can allocate to each asset. Obviously, your professional situation influences this decision. Being on a permanent contract with a steady, fixed income each month is different to working on a short-term contract or being self-employed.
Beyond the salary, it’s always a good idea to clear your debts and have a solid emergency fund in place before you start investing.
Keep in mind, however, that you can still invest on a small budget. Neo-brokers like BUX eliminate brokerage fees that eat into your profits so you can easily access the world of investing.
To recap, now you know the different assets out there. You know which type of investor you are and how much you’re willing to allocate to each investment. Next step: learn how to diversify your portfolio to minimize your risks.
All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.