Do you know that you should invest, but don’t know where and how to start? If yes then you are reading the right article as I will be discussing exactly what it takes to become a very successful investor.
Five Facts You Should Know About Investing-
1. Investing is compounding!
In simple term, investment equals to putting your money to ‘work hard’ to earn more money. It works on compounding, i.e. re-investment of earnings and time. For example, if you invest 10,000 USD at 5% annual interest, your earning would be 500 USD for the first year, 525 USD (5% of 10,500 USD) for the second year, and 551.25 USD (5% of 11,025 USD) and forever increasing year after year! While investment can make a person rich, one must bear in mind that it is not gambling, neither it is a get-rich scheme.
2. You must first know yourself before you start investing.
Three key questions you need to ask yourself before investing: what is your financial status, what are your financial goals and what kind of risk you can tolerate. Knowing yourself is important because this would directly and indirectly decide your preferred style of investing and the type of investors you become. There is no a single investing style that works for everyone, but there is always a right one that fits your needs and the kind of environment you are in.
3. Investing is about educating yourself!
Investment requires skills and knowledge. The last thing you would want to do with your hard-earned money is to blindly throw them into some investment schemes that you yourself is unsure of, that would be equal to gambling! So, you should spend some time to educate yourself about the area of investment you intend to participate in. Understand how it works can help you to plan your investment portfolio.
4. Investing is like a long adventure trip.
You need to have plans before you embark on a trip, similarly for your investments. Budget the amount of money you can invest as well as devise a strategy on how to maximise the usage of your money. Strategy must not only include how to enter the market, but how to exit with your profits. Proper planning can lower the risks of losing money.
5. Never put all your eggs in one basket.
Diversify your investment. Put it simply, if you are investing in a stock market, invest in more than one company. You risk losing all your money if you put them in a single company when its shares nosedive. It would be wiser to invest in more than one sector or different types of investments.
How To Become A Prudent Investor?
Patience is Key-
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson
Patience is the number one attribute of a prudent investor as no investments can guarantee fast profit. Moreover, value of investments typically fluctuates widely over the short term. Prudent investors typically look for long term rewards rather than short term gains.
Don’t Allow Emotions to Control Your Investment Decisions
“Temperament costs investors more than ignorance.”
“Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett.
Be rational and do not bring your emotions into your investments. This would include being cautious on over-performing investments and investing while others are trapped in their pessimism. Emotions like fear and greed can make you engage in negative behaviours and reduces your ability to grow wealth. Every investment decisions you make must be backed by research and facts and not by “gut feelings”.
Know the Market-
“An investment in knowledge always pays the best interest” – Benjamin Franklin.
In order to be a prudent investor you need to educate yourself and learn about the market. Without proper knowledge on what you are spending your hard-earned money on, it is like playing poker without looking at the cards.
Understand & Accept the Risk-
“Risk is what an entrepreneur eats for breakfast. It’s what she slips into bed with at night. If you have no appetite for this stuff, or no ability to digest it, then get out of the game right now.” – Heather Robertson
Acknowledge that in all investments, there will always be a period of market uncertainty, short term under-performance and crisis. Ask yourself “how much money you are ready to lose” rather than “how much you want to earn” before you invest. Take steps to minimise potential loses e.g. by diversifying your investments and be prepared mentally that sometimes market trend can be suddenly turn against you.
How to Choose The Right Investment
With the wide variety of investment options available, choosing the right investment is not straight forward. Put it simply, there is no single investment that fits everyone’s needs. What is the right investment for you depends on your needs and what do you expect to gain from it. This article provides a step-to-step guide to picking the right investment.
1. Assess your financial situation-
First question you need to ask yourself is how much money do you have to invest, and how much can you set aside every month for investment? Certain forms of investment require a lump sum payment, such as bonds and property, while others are more flexible such as stocks and Forex trading. It is advisable to put your age and future plans into consideration because if you are young working adults with no family commitments, you might have more loose funds to spare compared to a married adult planning to have children. Knowing how much you can afford now and how much you can commit in the future is a good starting point.
2. Determine your goals-
What kind of investments suit you depends on what you want to achieve from it. If you are investing for your own retirement or your children’s education, then you might want to opt for long term investment. Meanwhile, consider short term investment options with lower risks and more certainty of earning profit when you are investing for a holiday trip or a house for instance.
3. Understand your risk tolerance level-
Everyone tolerates investment risk differently. For example, if the thought of the stock market going up and down keeps you awake at night, then stock investment is probably not for you. Understand what kind of investors you are, so that you are always investing at your comfort level. This will give you a peace of mind and more confidence with where your money is going.
4. Assess the investment options-
Explore the different investment options available to you, according to your answers in Step 1 – 3. Cash and cash equivalents (e.g. savings, fixed deposits) offer the lowest risk yet lowest return whereas government bonds, mutual funds and blue chip stocks are considered low to moderate risks and potential high rate returns in the long term. Look at their past trends and performance and speak to those who were involved.
5. Reivew your portfolio and be balance-
As you build up your investment portfolio, review them regularly. Pick a mix of investments rather than just sticking to one, because not all investments grow at the same rate. This will allow your overall portfolio to grow while keeping any losses in balance.
How to Save Money for Investment
All investments are based on one single assumption, i.e. you have extra cash to invest. Yet so many people out there are facing difficulties saving sufficient money for investment. How exactly to save money for investment?
1. Classify your monthly income-
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Dedicate a set proportion of your monthly income into LIS categories, namely Living, Investment, Saving. An example of an LIS proportion is 80% – 10% -10%. This means you would live with 80% of your income every month (for meals, utilities, loans, etc) and save the other 20%, 10% in Investment (strictly for investment only) and 10% in your savings (normal savings, you can also use it for weekend getaways, holiday trips, buy a new TV set, etc).
2. Spend only the necessary-
Set up budget how to spend your 80%. Find out areas of expenditure you can be thrifty on, which are usually going out, food and other non-essentials though ‘fun’ things. If you have any leftover money from your L category you can always channel more funds into your I and S. Never live beyond your means.
3. Save in bank accounts-
Save your 20% plus whatever leftover from L in bank. Explore different types of saving accounts and pick one which offers higher interest rate. This not only secures your fund, it also prevents you from accessing your funds readily.
4. Make it less accessible-
An additional step to secure your Investment fund is by making it less accessible, e.g. without using an ATM card. You should never touch your I fund, never ever, unless when you are using it for investments (e.g. stocks, house, etc).
5. Get started now!-
Regardless of how much is your monthly income and how much you have in your savings currently, start saving now! You can begin with 1 dollar in your account. As long as you keep doing it, you will soon have sufficient money for investment, as well as some savings for other purposes.
Dos & Don’ts for Successful Investment
Do make sure you understand all the investments you are making. Learn some basics on investments before you step in. Only invest in things you understand. You are taking unnecessary risks if you invest simply based on your gut feelings or other people’s judgements.
Do invest for long term. Investments do fluctuate in value, for example stocks and shares. However, this matters less in the long term as the ups and downs in the market will eventually even out. Thinking long term will give your more confidence and ease your worries on fluctuations in the value of your investments.
Do invest rationally. Be aware of how much money you have for investments. Do not put your entire savings into the market because profit is never guaranteed. Use strategies instead of random guesses and media speculation.
Do get rid of unprofitable investments. When an investment is losing your money, sell it. Use the money in other investments rather than letting it to sit there and lose value.
Do not panic. Values of investment will fluctuate. Price decline is a norm in any equity market. When its value goes down, acknowledge that the market is volatile and stay calm. Stick to your strategies.
Do not listen to rumours. Be suspicious of ‘insider news’ or tips that promise to earn you big bucks in shortest time. Assess them with your knowledge and judge for yourself. Be your own master.
Do not put all your eggs in one basket. Diversify your investments. This spreads your risks. For example, if you are invested in a stock market, do not just buy stocks from a single company or the same sector. It is safer to earn a little each time and accumulate the profit over a period of time. Never treat an investment like a bet.
Do not get emotionally attached to investments. It is easy to feel emotionally attached to investments that have served you well in the past. However, if they are no longer performing, leave them behind and move on.
To your great investment success! Bob@Lurnprofit
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