Sidestepping Potential Pitfalls: 5 Tips for Young Investors

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InvestBuild a better future by investing your money wisely.

After finishing school and landing your first real job comes the sad reality. By now, you have probably realized that relying on your paycheck alone would not give you the freedom to do or buy anything you have always dreamed of. As such, a lot of young people are thinking about investing their hard earned money to help them supplement their income, save for their first house, and build a more comfortable nest egg to avoid going bust in their retirement

To start saving for the future and escape the vicious paycheck to paycheck cycle, here are some tips that every young investor should consider.

Start early. If you want to live a more comfortable life in the future, start investing while you are young. Take advantage of the fact that you still don’t have any significant financial burdens (mortgages, spouse’s and kids’ expenses) so you can put your savings on an investment option that you like. Starting your investment activities early also allows you to take advantage of compounding interest which allows your money to grow at a faster rate.

Learn to save. You can only start investing if you have enough money saved so start saving instead of spending your money on less important things. Track your expenses for several months to know exactly where your money goes, and figure out how you can save enough money to get you started. Avoid spending based on income that you are yet to receive since this can increase your risk of incurring some serious debt problems in the future.

Diversify your portfolio. Studies indicate that asset allocation is the single most important factor that determines the performance of your investment. Therefore, you should maintain a diversified portfolio at all times to make the most from your investment. Consider having a healthy mix of low-risk, medium-risk and high-risk assets and re-invest your returns to maximize your earnings.

Don’t be afraid to take risks. Since you have time on your side, you can afford to take bigger risks and buy stocks that have higher potential return. However, you should not throw caution to the wind and gamble your money on any investment that promises the big win.

Understand how inflation affects your returns.
Keep in mind that the inflation rate can significantly affect your returns. To get the actual rate of return on your investment, compare the return on your portfolio with the annual inflation rate. The difference between the two represents your actual earnings for the year.