The first step towards conscious investing is already behind you: you know that you need to set goals, develop a plan and set a time horizon. These are the foundations on which further decisions can be built. However, the foundation alone is not enough. To actually start investing, you still need to prepare your capital, determine how much volatility you can accept, and understand why diversification is one of the key tools for mitigating risk.
Organize funds for investments
In the second part of the “Explore Investing” series, we will look at these three issues. Thanks to them, you will learn where to get funds for investments, how to determine your risk profile and how to arrange your portfolio so that you do not depend on the performance of one asset class.
The most common mistake beginners make is to invest money that is actually needed for current expenses or creates a safety cushion. Meanwhile, investment capital should be separated from savings intended for everyday life or unforeseen situations.
Therefore, before you invest your first zloty, it is worth to:
- Create an emergency fund – funds for 3-6 months of life, kept in an easily accessible form (savings account, short-term deposit). This way, you won’t have to liquidate your investment at the wrong time.
- Separate investment money – preferably in a separate brokerage account or an account from which you do not finance your daily expenses.
- Regularly add funds – even small but systematic amounts (e.g. PLN 200-500 per month) allow you to build significant capital in the long run.
This approach teaches discipline and protects against impulsively pulling money out of investments when an urgent need arises. In practice, you only invest what you can really put aside for the future.
Determine the accepted risk level
Investing is always a game with uncertainty. There is no financial instrument that guarantees high returns without any risk. Therefore, every trader should determine their risk profile — that is, the level of volatility and potential losses that they are willing to accept in order to pursue certain profits.
There are three basic profiles:
- Conservative – the most important thing is the security of capital. Such an investor prefers bonds, deposits, money funds and is ready to accept a low rate of return.
- Sustainable – ready for larger fluctuations in the value of the portfolio, but at the same time looking for stability. The portfolio includes both stocks and bonds, sometimes supplemented with index funds or commodities.
- Aggressive – focuses on higher profit potential, accepting a high risk of losses. Such an investor chooses growth stocks, emerging markets or cryptocurrencies.
In practice, the risk profile depends not only on the nature of the investor, but also on his life situation. A young person, with a large time horizon, can afford to take a greater risk than someone who wants to use the accumulated funds in 5 years. It is also worth remembering that the risk profile is not constant – it changes with experience, age or financial situation.
Understand diversification
Even the best-suited risk profile and investment plan can fail if you invest all your funds in one type of asset. That is why investors have been repeating the rule for years: “don’t put all your eggs in one basket”.
Diversification means dividing your portfolio into different asset classes and instruments to reduce the risk associated with the failure of a single investment. Its advantages are enormous:
- Reduces risk – declines in one asset class can be offset by increases in another.
- It stabilizes the results – a diversified portfolio is less susceptible to sudden market shocks.
- It gives you more opportunities – by combining different instruments, you can take advantage of opportunities in many markets at the same time.
Example: an investor who holds all his funds in shares of one technology company risks a lot. If a company goes through a crisis, the value of the portfolio will drop drastically. Meanwhile, a portfolio made up of global stocks, bonds, gold, and real estate is more likely to remain stable even in difficult times.
It is worth remembering that diversification applies not only to asset classes, but also to geography (e.g. Europe, USA, emerging markets) or currencies. This protects you from the risk of local crises and exchange rate changes.
Investing is a process where every step matters. Once you’ve defined your goals and plan, it’s time to get down to business: set aside funds for investments, define your own risk profile, and learn how to diversify. These are three more pillars that make investing stop being a chaotic experiment and become an orderly and well-thought-out way to achieve financial goals. In the next part of the series, we will focus on individual asset classes and consider how to choose instruments so that the investment portfolio is both effective and resistant to market turbulence.