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Five things to consider before investing

We invest simply because it allows us to grow our money. We can invest our money on stocks, bonds and mutual funds. Investing has the potential to build and create wealth. Before we invest, the following are the five things we need to consider:

1. Establish your emergency fund. Before you invest, it will be good if you have set aside enough money as your emergency fund. The reason for doing so is that, it is not easy to pull out the money you have put in an investment in case of emergency.

2. Identify your risk tolerance. The degree of investment varies from person to person. Each person has different liabilities in life. You have to determine your risk tolerance before investing. If you are the breadwinner in your family, you may want to invest in bonds where there is a steady flow of income. However, if you are single and free from responsibility, you may want to invest in stocks where there is higher return but you have to also note that it has a greater risk.

3. Diversify your portfolio. Diversifying portfolio is combining a variety of assets to reduce the risk of losing money. We should allot our investment on bonds, stocks and mutual funds. If investment in one category is not performing well, there are other two categories that we can turn to.

4. Use dollar-cost averaging. Dollar-cost averaging is a technique of investing wherein a person buys shares regularly in a fixed amount regardless of the share price. For example, you set aside $100 to invest on one company every month. This is a good strategy rather than investing in a lump sum.

5. Determine how long to hold your investment portfolio. Know when you need the money. If you will invest for short term goals, then you need to invest somewhere where there is lower risk of losing money. However, if you will invest long term, then you can take on an investment with more risk since there is enough time for recovery.

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