According to Cambridge Dictionary, investment is “the act of putting money, effort, time, etc., into something to make a profit or get an advantage.”
Why Do We Need To Invest?
Investment has become increasingly important over the years, as the future of social security benefits becomes unknown. People want to ensure their futures. They know that if they depend on Social Security benefits, and in some cases, retirement plans, they may be in for a rude awakening when they no longer have the ability to earn a steady income.
Investing is the answer to the unknowns of the future.
You may have been saving money in a low-interest savings account over the years. Now, you want to see that money grow at a faster pace. Perhaps you’ve inherited money or realized some other type of windfall, and you need a way to make that money grow. Again, investing is the answer.
Investing is also a way of attaining the things you want, such as a new home, a college education for your children, or expensive ‘toys.’ Of course, your financial goals will determine what type of investing you do.
If you want or need to make a lot of money fast, you would be more interested in higher-risk investing, which will give you a larger return in a shorter amount of time. If you are saving for something in the far-off future, such as retirement, you would want to make safer investments that grow over a longer period of time.
The overall purpose of investing is to create wealth and security over a period of time. It is important to remember that you will not always be able to earn an income… you will eventually want to retire.
Five Must-Know Facts about Making Investments
Now that you know you should invest but don’t know where to start? If yes, you are reading the right article to discuss the five must-know facts about making investments!
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Investing is compounding!
Investment is about putting your money to work hard to earn more money for you. It works by compound interest, where the interest earned on previous investments is reinvested back into the original principal. For example, if you invest £10,000 at 5% per annum, your earnings would be £500 after the first year, £525 after the second year, and so on.
While investment can make you rich, we cannot guarantee what the future holds. All investments are risky, and you should only invest what you want to lose.
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You must first know yourself before you start investing.
Know yourself to determine your investments style. Before investing, make sure you ask yourself three key questions: what is your financial status, what do you want to achieve with your investments, and how much risk are you willing to take? Starting to invest can be overwhelming at first, but you’ll start narrowing down what suits your needs if you think about who you are, how much time/effort to put in, and what kind of investor you want to be. No single investing style is a perfect fit for everyone, but there will always be the right one for you. It’s just who you are, and the kind of environment you’re in that decides what investing style will work best for you.
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Investing is about educating yourself!
Investment requires knowledge and skills. If you blindly invest your money without knowing what you’re doing, it would be risky and similar to gambling. If you consider investing in something, make sure to spend time learning about it. This way, when you put your money in the asset, you’ll know what to expect and how it works. This will also help with planning your investment portfolio.
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Investing is like a long adventure trip.
Before planning a trip, one should consider their budget and devise a strategy. In the same way, before starting fresh investments, you need to plan out how much money you can invest and what your strategy for investing would be.
You can’t just enter a market and then leave without a plan. The knowledge of the exit strategy makes your risk of losing money lower.
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Never put all your eggs in one basket.
Consider diversifying your investments. If you are investing in the stock market, it is wise to invest in more than one company. If a company’s shares plummet, you risk losing all of your money if you happen to invest everything in that particular company. It would be wiser to invest in more than one sector or different types of investments.
Tips to Become a Prudent Investor
Be Patient
“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 key when it comes to being a successful long-term investor. While no investment can guarantee profits quickly, most investments have their value fluctuate in the short term.
Prudent investors usually 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.
Being rational and not investing based on emotions will allow you to make better investments, for example, by being cautious about over-performing investments and avoiding investing when others are trapped in their pessimism. Anxiety and greed can influence you to make risky decisions when investing. You should only invest in something after performing research and being sure it’s a good opportunity. Your gut feelings shouldn’t be the main source of decision-making.
Know the Market
“An investment in knowledge always pays the best interest” – Benjamin Franklin.
To be a prudent investor, it’s important to stay educated and knowledgeable about the market. Not doing your research will leave you open to all sorts of risks that you could avoid with a deeper understanding.
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.
Understand that investing always carries a degree of risk, and be ready to go through periods of under-performance. Keep in mind that you can still face a crash or major economic downturn even if you invest properly. You need to ask yourself, “How much money am I willing to lose before I stop investing?” instead of “how much do I want to earn?”
Taking steps to optimize potential profits by diversifying your portfolio and mentally preparing for all eventualities can help limit risk.
How to Choose The Right Investment
There are many investment options out there. They each have their own benefits and drawbacks. No one investment fits everyone’s needs, so it’s important to find the one that works best for you. Here’s a step-to-step guide you can use to pick the right investment for your needs. Keep in mind that it will depend on what you expect out of the investment and what your current financial situation is.
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Assess your financial situation
Firstly, you need to figure out how much money you can invest. With some investments like bonds or property, you’ll need a lump sum to start, but you might usually only need a little bit of cash each month to invest in other things like stocks and shares. Considering your age and plans before starting a business is important. Young people with no family commitments might have more loose cash than those engaged or planning to be engaged or married and with children. The first thing you’ll need to figure out is how much money you can spend now and how much more money you might be willing to invest in the future.
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Determine your goals
What kind of investments you choose really depends on your needs. For example, if you invest for your own retirement or your child’s education, it would be best to go for long-term investments that give you higher yields.
Short-term investment options with lower risk and more certainty of earning profit will be a good option if you’re saving for a holiday trip or home.
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Understand your risk tolerance level
There are risks in every investment, but some people are more comfortable than others handling them. For example, if you’re someone who doubts market efficiency and thinks of it as an unpredictable endeavor, then asset allocation may not be for you. Being aware of the type of investor you are will help you decide where to invest. You’ll then have peace of mind and confidence that your investments are appropriate for you.
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Assess the investment options
Explore the different investment options available to you, according to your answers in Step 1 – 3. You can split your savings from high to low-risk investments. Low-risk investments such as cash and fixed deposits have the lowest volatility but lower return. In contrast, moderate risk categories such as blue-chip stocks and government bonds offer a moderate rate of return in the long term.
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Review your portfolio and be balanced
As you invest more money, it’s important to review your investments regularly. Not all investments have the same rate of return, so it’s always worth spreading your risk by investing in a range of different things. This will allow your returns to increase without anyone possibly pulling the average way down.
How to Save Money for Investment
One of the things that often gets overlooked is saving money for investment. Every investment is based on a single, critical assumption: that those who use those funds have the ability to do so. So here are a few tips and tricks:
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Classify your monthly income
Allocate a proportion of your monthly income to the three major categories: Living, Investment, Saving (LIS). Living on 80% of your income every month is a good idea while putting the other 20% in investments and savings. For instance, 10% in investments and 10% in savings.
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Spend only the necessary
Set up a budget, so you know how to spend your 80%. You can save on going on costly outings or buying fancy food. Instead, put some extra money away for the future by making investments and acquiring savings. If you’ve got some spare cash after taking care of your L category, then funnel that into the I and S account.
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Save in bank accounts.
Saving up your 20% and more from the L portion is a good idea – but how you save it depends on what’s important to you. You can explore different types of savings accounts and pick one that has the best interest rate for you. This way, your money stays safe and ready for when you need it without easy access.
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Make it less accessible.
You can decrease your chances of getting your investment fund compromised by making it less accessible. For example, you might not use an ATM card to withdraw money from your account, and you should never touch the account without good cause (e.g., investing the money).
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Get started now!
Regardless of your monthly salary or any savings you have, start saving now. Save £1 per month, and you’ll soon have enough for investing as well.
Conclusion:
Try to learn the basics of investment and start saving to invest! Cheers to your investment success!