With interest rates at record lows, money sitting idly in a bank account probably won’t go very far. While not everyone is keen on the idea of investing hard-earned savings, it could be a good option for those wanting to grow their balance over the long term.
These days investing smaller amounts is common, with platforms like eToro providing a platform for beginners to experience the stock market without risking a large chunk of their savings. When looking to invest with less than $5,000, there are three important questions you need to ask yourself.
Do you have plans for the money?
If you have a plan for the money, like for a car, home deposit or wedding, for example, investing might not be the best way forward. If you’re planning on putting the money towards something important, you might be better off leaving it where it is and continuing to save.
It also comes down to the timeframe you’re willing to have the money tied up in stocks, so if you have plans for the money in a year or so’s time, you might want to reconsider. As eToro’s market analyst Josh Gilbert says, it’s certainly not a way to get rich quick.
“The biggest mistake can be that people are hoping to become rich overnight,” Gilbert told Lifehacker Australia. “You need to have a clear goal in mind when first investing that money. When do you need it back? Can you leave it there for 2 years? Will you be scared at the first dip in the market?”
“Most of our successful Popular Investors at eToro have long term stock portfolios, where they purchase stocks with growth potential. They are happy to put aside funds for a number of years and allow this to grow over time. So patience is a big factor in investing.”
How much are you willing to lose?
This also plays into the second important point — risk. No matter how safe you plan on playing the market, there’s always a level of risk involved. In other words, you need to know how much money you’re comfortable losing.
“High-risk mindsets amongst inexperienced investors may result in losses, especially during the global pandemic when markets have been extremely volatile,” eToro managing director Robert Francis told PEDESTRIAN.TV.
Getting a feel for things with a small amount before diving in with your savings could be a good way to mitigate this. It’s also incredibly important to prioritise your finances appropriately. When considering investing, it’s best to first pay down bad debts.
“People like to jump into investing without looking at their financial situation,” eToro popular investor Joseph Milazzo told Business Insider. “Things like bad debt are like reverse investing, where the longer you leave it, the more it will take from you over time.”
Are you willing to put in the work?
If you do decide to jump into managing your own investments, will you have the time to put in the groundwork? Going in blind could have a detrimental outcome.
“Jumping into the stock market without having any prior knowledge is not wise,” eToro managing director Robert Francis told PEDESTRIAN.TV. “Inexperienced investors taking high risks are most likely to lose capital. Watch, learn and practice before investing any money.”
If you’re keen to get a handle on things before putting your own skin in the game, platforms like eToro allow budding investors to practice with no risk.
“Investors can practice with a virtual account so you can play around with a mock portfolio without having to risk any real money.”
Researching a company you plan on investing in is paramount, but outside of that, Moneysmart recommends keeping an eye on the following, as they all play a part in the value of stocks on the market.
- The Australian economy
- Interest rates
- Government policy
- Exchange rates
- Investor sentiment
- Industry-specific or regional influences
- Relevant overseas economies and markets
Putting in the time to thoroughly research your investments can put you in a better position in the long run.
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