How to Start Investing as a Beginner
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First of all, let’s start by talking about why you should even bother thinking about investing in the first place. Since we were children, our parents have always said that saving money is the best way to get rich in the future. This statement is simply a false statement, in my opinion. Suppose you have studied economics in the past. In that case, you should know that money loses value over time thanks to something called inflation.
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An easy example of this is the price of candy twenty years ago must be way lower than it is now. This reality means that your money is worth less and less per year. Indonesia statistics also show that the yearly inflation rate of 5-10% means that your money will be worth 50-100% less in the next ten years.
So, you now may wonder how do we stop our money from losing value over time. Well, let’s say you have a hypothetical savings account that gives you interest the same as the inflation rate at 5-10% per year. By mathematics, this will cancel out, and your money will have the same value in any year in the future. But, since we all know the banks only give us 0.1-1% interest per year, it is just not possible to earn a consistent 5-10% per year by just putting the money into a savings account. That is why we need to invest in an investment instrument to reach this goal.
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Now, after knowing the importance of investing. We will then need to talk about the type of risk profile out there. All people usually fall into three different risk profiles. The first one is the conservative, which means he/she would like a small gain per year, at least the same as the inflation rate with little to no price volatility. The second type is the moderate type, which means he/she would have a percentage return higher than the inflation rate but with more significant fluctuations. The last and final type is the aggressive type; this type usually wants the highest return percentage and can deal with the market’s high volatility. To find out your risk profile, I recommend you to take this test at https://app.bibit.id/.
After understanding your risk profile, we can now finally discuss the types of investment instruments available out there. I will briefly explain the two most popular investment instruments: mutual funds and stocks. I will also describe their benefits and risks so you can adjust your portfolio accordingly in the future.
- Mutual Fund
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A mutual fund is a type of financial vehicle made out of a pool of money from retail investors, which professional investment managers then manage. The investment managers will manage that pool of money to produce capital gains or passive income for the fund’s investors. The investment managers can put that pool of money in various assets such as debt-based securities, bonds, stocks, etc. It is an excellent way to start your investing journey as a beginner since it requires little to no knowledge and time but has a decent return each year at around 5-15%.
- Stocks
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Stock is a security that represents the ownership of a corporation. So basically, if you want to own your favorite company, such as Google, you can do that by buying their stocks. Stocks have their units called shares, so if a company has 1.000.000 shares and you buy 10 of those shares, you will then own 1/100.000th of the company.
There are two ways to make money in stocks which are capital gain and dividend. Capital gain means if the price of those shares that you buy go up in price in the future, you can sell it to someone else at that higher price for a profit. For dividend, it is straightforward; since you own a percentage of a company, every time the company receives some profit, you will also earn a percentage of that profit. This investment is better for someone who has some investing background and knowledge since it requires more skills such as mindset, method, and money management.
In conclusion, investment is for everybody; saving will not get you rich anymore due to the rise of inflation in our nation. To fight back inflation, the least we can do is invest our money and hope it grows in the next 10-15 years. There are many types of investment out there, so every investment has its audience. Don’t follow anyone you know just because they recommend it to you without knowing in-depth about that investment instrument. Every person has their risk profile and needs, so keep that in mind when you want to start picking your investment instrument. Also, one important note to remember is, the sooner you begin to invest, the better your life will be financially in the future.
References:
https://www.valueresearchonline.com/stories/28901/why-should-i-invest/
https://www.investopedia.com/terms/m/mutualfund.asp
https://www.statista.com/statistics/320156/inflation-rate-in-indonesia/
Image Sources:
https://pixabay.com/photos/money-coin-investment-business-2724241/
https://pixabay.com/photos/money-burn-dollar-waste-finance-4418858/
https://www.eastspring.com/id/en/investor-tools/risk-profile-calculator
https://pixabay.com/photos/woman-women-office-work-business-2773007/
https://pixabay.com/photos/blur-chart-computer-data-finance-1853262/