Whether you’re a seasoned investor looking at a new opportunity or asset class, or you’re a newcomer that’s looking to learn the ropes of setting up a solid portfolio, there are plenty of things to consider before investing your hard-earned money. You’ll no doubt want to make sure your individual investments are high-quality and primed to earn you dividends, but you’ll also want to make sure that you know how they all fit together within a portfolio designed for success.
There are many aspects of investing that are worth considering before making a move. But the top things to consider before investing boil down to a simple set of questions you’ll want to ask yourself as you vet your options.
Any consideration about investing has to begin with a thorough understanding of your current personal finances. Before putting money into a financial product, you have to ensure that you can afford life’s basic necessities without needing to potentially pull out investments to cover expenses. This means knowing your income, your budgetary needs, and having at least six months’ worth of savings stashed away for the unexpected. Even if you’re investing small amounts, you’ll still need the security of a well-cushioned emergency fund.
An investing strategy has to come after you have already made sure you can maintain a steady budget, and that you have readily accessible savings at your disposal. Smart investing means putting money into the markets or alternative investments once you’re certain you won’t need the money in a pinch.
When it comes to investing, risk means different things to different people. Generally speaking, risk is the potential of an investment not generating a return, or even losing value. Every investment opportunity comes with some amount of risk: a stock can lose value, real estate can end up being less valuable than it was when you bought it, and even rare coins can become less valuable if a treasure trove of them is discovered. No investment is risk-free, even if the amount of risk each investment has varies.
How one defines risk in their portfolio is different, however. Someone who might be new to investing may only have a small amount of money to put toward an opportunity. In this case, they may want to opt for an index fund versus direct stock ownership, as stock fluctuations may pose a risk to their holdings. Alternatively, a qualified investor with significant investment funds might want to participate in a hedge fund, but is afraid of the significant risk of having that investment go bust.
On the other hand, risk is a vital part of investing. Without risk, there is no reward. The riskier an investment is, the more it tends to pay dividends to investors. You stand more to gain when buying into a private equity fund where returns are much higher than Wall Street investing. But, on the other hand, you also stand to lose more money if the fund fails to deliver—especially as most funds require an investment of at least six figures.
Everyone’s appetite for risk is different. Sizing up yours means looking at your financial goals, assets, and how aggressive you’re willing to get with your money.
Evaluating risk goes hand-in-hand with crafting a well-balanced portfolio. Too much risk in too many places can leave your entire portfolio exposed to major losses in the event of one or several downturns. For example’s sake, let’s say you invested heavily in travel-related stocks: airlines, hotels, and cruise lines. As COVID-19 began to affect the world, stock prices for many companies in the travel sector began to plummet. Public health policies restricted travel, and people who could travel by and large opted not to.
Without holdings in other sectors, your portfolio will have likely lost a significant amount of value. With a balanced portfolio, however, you would be able to withstand the downturn and minimize your losses. This is particularly true if, by way of example, you invested in streaming companies and businesses that offer remote working tools. These stocks began to skyrocket as the world turned to working remotely for the foreseeable future. The gains made in those investments would offset losses from travel-related holdings.
Most investments in a typical portfolio are either high-risk/high-reward, medium-risk/medium-reward, or low-risk/low-reward. Finding an opportunity that offers a high reward without a significant amount of risk isn’t necessarily easy, but it isn’t impossible. There are a few alternative investments out there that can create significant value at a reasonable price, all without necessarily incurring the same kind of risk that other alternatives tend to come with.
Farmland investing, for example, offers a significant opportunity for a high return on investment without the same amount of risk that tends to come with real estate or commodities investing. Farmland has a remarkable track record when it comes to retaining value, and tends to increase in value even when the markets are in a downturn. FarmTogether’s team of investment specialists pick out the best options for the greatest return, enabling clients to pick from a range of offerings that suit their portfolio. Plus, unlike other alternatives, FarmTogether has a small minimum investment of only $10,000, making it an accessible opportunity to dip into new markets.
All investments come with their benefits and drawbacks. Depending on the role an investment plays in your portfolio, it may also have a considerable impact on how the rest of your holdings lead to overall financial success. Investing is a balancing act—too much of any one financial product, sector, or holding can leave you vulnerable to downswings and lost value. Playing it too safe with your portfolio can also leave you with missed opportunities to maximize your investments.
The best portfolio is a well-balanced, diversified portfolio. FarmTogether can help you build a set of holdings that can weather volatility, offer passive income, and diversify your portfolio in ways that other investments can’t.