How does your investment strategy differ between a bull and a bear market? If you’re unsure, it may be time to brush up on your financial literacy for investing.
Learning more about financial concepts and investment strategies can help you navigate the investment world.
If you’re craving even greater depth, consider the benefits of a dynamic investment platform. The right service can provide advanced tutorials, stock research tools and other resources to make you a better investor.
Why Financial Literacy Is Important in Investing
Entering the world of investing is like stepping into a new culture — the rules, structure and language will likely feel unfamiliar. That’s why financial literacy for investing is so important.
The best investment decisions are usually made through careful planning and research, not gut instinct. Financial literacy ensures that you’re making informed decisions about your investment portfolio.
10 Steps to Becoming Financially Literate in Investing
What can you do to improve your financial literacy for investing? Let the following steps guide you as you develop new skills and strategies.
1. Understand the Basics of Investing
First, take some time to understand the basics of investing. For example, what types of investing are you interested in? Common examples include:
- Stocks
- Bonds
- Cryptocurrency
- Real estate
- Precious metals, art or collectibles
It’s also important to distinguish between saving and investing. Investing is specifically intended to grow your assets. Stock market investing has historically provided an average rate of return of around 10% — considerably higher than any savings account.
Familiarizing yourself with these sorts of principles can give you a foundation for making other investment decisions.
2. Research Types of Investment Strategies
Not every investment strategy is the same. Take some time to learn more about strategies including diversification and the process of asset allocation,
Some of these strategies may depend on whether your goals are short term or long term, so it helps to choose a strategy that aligns with your individual investment plan.
3. Set Financial Goals and Establish an Investment Plan
What exactly are your financial goals? For new investors, long-term investment plans are often preferable to short-term strategies.
An investment plan will outline your investment strategy, the type of assets you plan to use and a timeline for various goals. A solid investment plan will also provide financial benchmarks along the way, helping you track your progress.
4. Assess Your Risk Tolerance
The same unpredictability that causes some stocks to rise can just as easily lead others to fall. Before investing, consider your risk tolerance. Just how much are you prepared to lose?
Those with low risk tolerance should consider ways to balance their portfolios to help minimize the impacts of unexpected market volatility. Conversely, younger or more affluent investors will likely have time to recover from investment losses, which may give them the ability to invest in that hot new startup you’ve been hearing about.
5. Determine Your Investment Timeframe
Are your goals long term or short term? Investment accounts are often used as a vehicle for retirement, but that doesn’t mean you can’t use an investment account to pay for a house or your children’s education.
Short-term investors have perhaps the greatest need for financial literacy for investing. That’s because they have to make rapid, decisions on how to allocate their resources and adopt risk-management strategies that help them attempt to build wealth in a narrow window of time.
6. Compare Investment Options
Along with stocks, some investors may want to pursue bonds, cryptocurrency, real estate investment trusts (REITs) or tangible assets like gold or valuable artwork. Some of these investments have a distinct advantage during certain economic climates. For example, some bonds are tied to the rate of inflation, helping to manage risk during periods of economic uncertainty.
7. Understand Investment Fees
Investors pay numerous fees in addition to the prices of various assets. These can include brokerage fees, investment commissions and more, depending on how actively your broker manages your investment portfolio.
8. Monitor Investment Performance
One of the most important things you can do as an investor is to monitor how well your investments are performing. Many brokerage accounts provide updates to keep you informed about your progress, though stock investment platforms can also provide additional tools to help you meet your investment goals.
9. Rebalance Your Portfolio
Every so often, you may need to rebalance your portfolio. In doing so, you’ll add shares of stocks from some industry sectors and jettison others.
For example, if your portfolio leans toward the tech industry, you might consider adding shares of consumer staples products. The goal is to maintain diversity
10. Use Financial Education Resources
Financial education resources can help you with your investments while teaching you tricks to track spending and stay within your budget. You can also learn to build an emergency fund to prepare for periods of economic uncertainty.
Financial Literacy for Investing and Beyond
Just as learning a new language can make you more appreciative of a particular culture, improving your financial literacy can make you more appreciative of the world of investing. These tips can make you a smarter investor and provide a solid foundation on which to build.
Frequently Asked Questions
What is the 50-30-20 rule of money?
You might have heard of the 50-30-20 rule of money but aren’t sure what it means. Essentially, it calls for an individual to spend 50% of their financial resources on their needs, 30% on their wants and the remaining 20% on savings and investments.
How can you invest smartly?
Wondering how to invest more intelligently? Careful research and planning can help you make better investment decisions that match your goals and risk tolerance.
Do I need a lot of money to start investing?
No, you don’t necessarily need a large sum of money to start investing. Many investment options, such as mutual funds or exchange-traded funds, have low minimum investment requirements. You can also start with a small amount and gradually increase your investments over time. The key is to get started and be consistent.
About Sarah Edwards
Sarah Edwards is a finance writer passionate about helping people learn more about what’s needed to achieve their financial goals. She has nearly a decade of writing experience focused on budgeting, investment strategies, retirement and industry trends. Her work has been published on NerdWallet and FinImpact.