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How to create your own low risk, low budget investment portfolio!
We continue our financial journey with investing money – if you missed last week’s post about investing in yourself, you can catch up here. This post is meant for investing beginners and will introduce you to the benefits and risks of investing, as well as introduce the basics of an investment portfolio.
Disclaimer: I’m not a financial advisor or professional, this blog post is only for educational purposes and to share what I read and experienced myself. Investing is always associated with a certain risk. Please get further information and be aware of the risks.
- Compounding and continuous long-term investments can show impressive results, even at a smaller budget.
- Have a long-term strategy that suits your personal risk tolerance and financial situation.
- Always diversify your investments and balance your portfolio!
- Make the money work for you and be in charge of your investments.
Benefits of investing
Investing can help you to get the most out of your money and generate a passive income, even at a smaller budget. Saving money is great, but considering inflation it’s not a financial strategy and a sure way to go broke slowly. Investing, although always with a certain risk, can be a powerful booster for your financial plan.
I think it’s one of the most common misconceptions that investing is only for those who are already wealthy. Reading several financial advice books I’ve come to understand that, in fact, investing probably helped them to even become so wealthy in the first place. Another misconception is that you need to invest thousands and thousands of euro to even see any results. Dividends may only be a few cents in the beginning, but eventually everything will add up to a nice sum.
Why people fail at investing
- They don’t even get started. – Just start with whatever you can afford and start young! I can’t turn back time, but if I could I’d start investing much earlier.
- They only a short term strategy.- Don’t try to make quick money with investing, play the long game.
- They don’t consider their risk tolerance. – Know your risk tolerance and stick to it!
- They panic and sell low. – Hold on to your stocks, don’t panic and stick to your long term strategy.
- They try to time the market. – Timing the market comes close to gambling and even experts can’t time it perfectly. If you want to keep it low risk, stick to your long term and continuous investments.
- They use expensive full time services with high commissions. – Stay in charge of your investments and choose options with low to no commissions to maximize your own gains.
How much should you invest?
The exact amount of your monthly investments depends on your personal income and financial situation. Don’t invest money that you need for your monthly expenses or that you might need in case of a financial emergency. These are costs you should have a monthly budget and an emergency saving set up. Read about these topics here. You should only invest money that you can afford to invest and won’t be liquidating any time soon. If you don’t have a lot of disposable income, you can start as low as 10% of your income, or even 25€. If you can manage, aim to invest 20-35%. Ambitioned financial plans even set 60% for investments aside. So, as you can see the percentage really depends on your income, risk tolerance and personal journey.
How should you diversify your portfolio?
When it comes to dividing your investments up into stocks and bonds, the equation is “100- your age = percent of portfolio in stocks”. As you get older the portions of your portfolio will shift to mirror the changes in your age associated risk tolerance. You can always tweak the equation to fit your personal situation, as it’s only a guideline. I’m 28, so 100-28 = 72, which means I should have 72% of my investment portfolio in stocks, and 28% in bonds.
A stock is a small share of a company that you can purchase. Stocks are bought and sold on stock exchanges. To buy stocks requires some knowledge about the company you want to invest in and is more risky because if you only buy one share, the success of your investment relies on that single stock. Of course you could use a full service investmet service, but they will probably charge you high commissions and may be more difficult to maintain.
Indexfunds are a great way to invest, if you wan’t to diversify and invest continuously without putting much work into researching the market and weighing risks. it’s a type of mutual fund, constructed to match or track the components of a financial market index like the S&P 500.
ETF stands for Exchange Traded Fund, this fund helps you to invest in many different companies and is extremely diversified within itself. This means you don’t get a full share in the stock of a company, but numerous small shares in many companies with just one investment. It’s an investment fund traded on stock exchange as well, that works with an arbitrage mechanism to keep its trading close to its net asset value. Mostly this will happen by tracking an index. You can buy and sell ETFs like stocks through your broker.
Because ETFs are so diversified, they are low risk and a great way to invest continuously long term without much effort. On the downside, you will not see huge rises if one stock from the ETF does extremely well, because it is so diversified and each stock is only a small portion. So how can you tweak this small imperfection? Balance inflation and tax deductions with a small percentage of higher risk investments that are still within your risk tolerance.
Bonds are a fixed income instrument. Each bond represents a loan given to the company by the investor. Bonds have a fixed maturity, once a bond is mature the investor can get his investment plus dividends back or reinvest. You can build a so called compound ladder by investing into several bonds that have varying maturities, making your bond investments more diversified and giving you access to a portion of your investments at the different maturities for liquidity.
Let’s say you have five different bonds, each with 1-5 years maturity, you set the first bond up with 5 years, the second with 4, all the way to the last bond with 1 year maturity. After one year the latter will be mature, you can reinvest it in a bond with maturity of 5 years and repeat this step each year. After 5 years you reinvest into the bond with maturity of 5 years – you have a compound ladder with yearly maturity, each bond with a maturity of 5 years!
Investing can be done at smaller budgets as well. It’s seems scary at first, but you will grow into it. As soon as you see results, you will be so motivated and excited and want to keep going. Next week, we will have a look at how to actually buy a stock and set up an ETF savings plan step by step. Stay tuned!
Do you invest regularly or do you want to start investing?
Can’t wait? I recommend this book ( link is affiliated):