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5 Basic Investing Principles

Investing can be a great way to build wealth as a young adult. But if you don’t know anything about stock or bonds, you might be tempted to avoid the process of investing altogether. Avoiding investing means you could miss out on the chance to earn big returns, though. Check out the tips below to help you get started. Remember, an early start can make all the difference when it comes to your net worth.

Check out our investment calculator.

1. Be Safe

It’s important to take stock of your financial situation. You don’t want to tie up the money you need for next month’s rent in a bond you can’t access for ten years. For this reason it’s a good idea to have a savings account, checking account and an emergency fund separate from your investment portfolio.

2. Know Your Style

It’s wise to know not just where your personal finances stand, but to also what kind of investor you are. In general, there are active, involved investors and passive investors. More active investors may like to pick the companies they invest in. More passive investors may want to pick low-fee mutual funds instead.

Related Article: Investing for Beginners

3. Evaluate Your Options

5 Basic Investing Principles

It’s a good idea to do considerable research before you start investing. The more you know, the better off you’ll be. It’s a good idea to keep track of how each of your investments aligns with your overall strategy, and to understand the risk level you’re exposed to.

Keep in mind that past performance doesn’t dictate an asset’s future performance. There are books, newspaper columns and blog posts that can help you choose the right securities. You can even join an investment club or organization.

4. Diversify

“Don’t put all your eggs in one basket” might sound like an outdated phrase, but it still applies to investing. Having all of your funds in one stock or one type of stock can be dangerous. That’s why diversifying your portfolio is key. By adjusting your asset allocation and spreading out your investments in stocks, bonds and other securities, you’ll lower your risk exposure.

Try out our asset allocation calculator.

5. Expect Some Volatility

5 Basic Investing Principles

Investing doesn’t come with guarantees. There will inevitably be fluctuations in your securities’ values. But you can’t let the market’s daily changes affect your emotions or your investment decisions. Panicking won’t help you. If the idea of picking winners is too daunting for you, you can always opt for an index fund that tracks the overall market. That way, you won’t have to research each stock or bond you invest in.

Photo credit: ©iStock.com/iofoto, ©iStock.com/casaalmare, ©iStock.com/DNY59

Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz's articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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