3 things you should know before you start investing

Investing your money is critical, and if you don’t already do so, I advise you to start. This is how Marc Frau, author of Opinatron and Inversionautom√°tica.com, tells us in this article what his formula is.

Besides, although sometimes it may not seem so, investing is easy, and anyone can do it.

However, you can’t do it in a crazy way and without having a plan, as it will surely go wrong.

That’s why in this article I want to talk to you about the 3 things you should know before you start investing your money

Three things that, once you know for sure, can lead you to success as an investor.

1 – What time frame do you want to invest your money in

The first thing you should know before you start investing your money is exactly what you want to achieve.

It won’t be the same if you want to make a profit on money you will need in 1 year or if you want to start preparing a mattress for your retirement.

Therefore, the first fundamental aspect to take into account is the time frame in which you are going to invest your money.

We can differentiate between 3 investment terms, and I’ll tell you right now that my favourite is the long term.

Short term

The short term is equivalent to between 0 and 2 years.

Short term investment is something known as trading, and in my opinion it is quite risky and I would not recommend it.

If you have money and you want to make it profitable in the short term, my opinion is that the best thing is a bank deposit or an interest-bearing account.

Medium term

The medium term is equivalent to between 2 and 5 years.

You may be saving up to buy a house in a few years, and you want to make that saving pay off so that you don’t have the money standing around.

In that case, your investment objective will be the medium term.

Investing in the medium term is difficult, because it is not advisable to use the same instruments as when investing in the long term, which are those that offer the best return/risk ratio.

But it is also true that it does not make sense to have your money stopped for 4 years, for example.

If you want to invest in the medium term, one option can be the same as before, bank deposits.

There is also another option that is quite interesting and that is becoming more and more fashionable, crowdlending. 

Long term

The short term is equivalent to more than 5 years, even 10 years.

As I told you before, the long term investment is my favorite, and I think it is the most recommended for many.

Among the many options that someone would have, I think the most interesting for someone who is starting out is undoubtedly investing in index funds through a robbery advisor.

Here is a comparison of the most important robo advisors to start with. 

Investing for the long term through a Robo Advisor has, among others, the following advantages:

  • The risk is low, because the longer term the less risk.
  • The average expected return is quite high, around 7% per year, a figure with which you would double your money every 10 years.
  • You take advantage of compound interest.
  • The diversification is very high, since you will be investing your money in thousands of companies all over the world.
  • The investment is totally automatic and does not require dedication, so it is a method suitable for anyone.
  • Commissions are much lower than those offered by most banks.

The biggest disadvantage of long-term investing is that it is not suitable for someone who wants to get their money back in a short time.

It could be recovered, but it is not ideal because if the stock market is low you would be losing money.

Personally I advise you to invest in the long term, but only if you are not going to need that money for at least 5 years, even more.

2 – How much money you save and how much you will invest each month.

This aspect is also very important, and is something you should be clear about even if you don’t want to invest.

Almost everyone works to make money at the end of the month, and usually that money comes out of the account very quickly.

Saving is fundamental, and it is also very important to know how much you are saving and have a plan to follow.

One option, for example, is pre-saving, which ensures that you always save the same amount.

When you know how much money you are saving, you can decide how much you want to invest, so that you can also draw up your investment plan.

The first step will be to create a safety cushion, if you don’t have one, with which to face the unexpected.

You do not want to have 100% of your money invested, because if something happens that makes you need money you will have to recover part of your investment regardless of how the market is.

When you have the mattress you can invest the rest, and my advice is to do so by diversifying temporarily.

For example, if you save 500 euros a month and decide to invest 300 euros, you could make purchases of 600 euros every 2 months, or even 900 euros every 3 months.

What is really important is that you have a plan and follow it, both to save and to invest.

Usually doing things without planning does not give the best possible results.

3- What investment strategy do you want to apply

Although I have already told you in the first point of what I consider the best investment options in terms of time, I do not want to finish the article without mentioning the importance of being clear about your investment strategy.

Starting to invest without being clear about what you want to do is a mistake, since you will most likely end up making twists and turns in your strategy, something that will surely make you lose money.

Decide how much money you want to invest and how long you want to invest it, and then decide which strategy or strategies you are going to follow.

As I said, my preferred strategy is to invest in index funds through a Robo Advisor, which is an automated manager that creates and manages a diversified portfolio for you.

But that’s not the only acceptable option.

You can also invest in crowdlending, trading, buy and hold, value investing and many other alternatives.

The main thing is that you have a clear idea of what you want to do before you do it.

Investing is not difficult, and anyone can multiply their money by doing it, but you can also lose money if you don’t have things clear.