Before you begin your investment journey, it is recommended that you have a plan in place. This means defining your financial objectives, as this will allow you to choose the financial instruments that can fulfill these objectives and suit your risk appetite. But, how do you come up with this plan? Shay Benhamou suggests that you ask some important questions and use the answers for doing so. What are these questions? Take a look below;
What are your goals?
First and foremost, Shay Benhamou suggests that you define your goals. Why do you want to invest in the stock market? Is it because you want to save for retirement, or for a college fund? Yes, the answer is important because it will help you decide whether you should go for a high-interest savings account, mutual fund, government bonds, and commercial paper and so on.
What to expect from the stock market?
You need to understand the risks associated with your investment in the stock market. As mentioned above, there are different ways for you to go about your investment and the risk associated with every option will be different. As per Shay Benhamou, the risk factor depends on various elements, such as consumer emotions, earnings, political events as well as natural disasters. Other than the risk factors, it is also important to analyze the investment strategies for determining if the returns are practical and realistic.
How long do you plan to invest?
It is important to define how long you plan to invest for because it will also affect your choice of investments. Shay Benhamou states that your investment mode will depend on whether your goals are short-term, or long-term. If you are saving for the future, then you can go with treasury bonds, or corporate bonds. Likewise, your choices will be different if you have short-term goals.
How much will it cost?
The decision to buy and hold can offer you tax benefits and is cheaper in the long-term, as opposed to other schemes. Moreover, Shay Benhamou adds that this strategy results in lower trading commissions as well as advisory fees, which allows investors to get higher returns to make up for these extra costs. In addition, experts believe that what you buy, hold and then sell is more important, rather than when you choose to buy or sell it.
What is the company’s price-earnings ratio?
One of the most important things that you need to know before investing in the stock market is the PE ratio of the company. Shay Benhamou says that it can help you in determining the stock valuation, so you can find out if the stock is priced fairly or not. This means that the PE ratio can help you in identifying whether a stock is underpriced or overpriced. Depending on the earnings of the company, you can discover if the market is in favor of the stock or not. Moreover, the PE ratio is also helpful in determining the future earnings of the company. Hence, if a rise in earnings is expected, it could lead to higher dividends for you.
How to minimize risks?
This is another crucial thing you need to ask and Shay Benhamou recommends maintaining a well-diversified portfolio for minimizing your risks. Since all investment schemes have some risk associated with them, it is a good idea to invest across different types of assets, such as cash, bonds and stocks. You should not just consider asset allocation, but also invest across different industries, such as real estate, pharmaceutical, telecom, automobile and so on. The impact of these investments will vary, depending on the economic factors. Thus, when you have a diversified portfolio, you will be able to minimize your risk exposure and it will allow you to maximize your returns.
In a nutshell, Shay Benhamou highlights that you have to have sufficient knowledge for starting your trading journey.