Investments
An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of
an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.
Know the risks
Investing your money can be a rewarding experience because of the risk involved in the process. The greater the risk, the greater the reward.
However, an acceptable risk for one person may not be an acceptable risk for the next. While investing your money may sound daunting, you don’t have to manage your portfolio yourself if you understand the risks behind investing your money, you can hire a portfolio manager to do the legwork for you
Rules are important
If you’re looking to manage your own portfolio, the greatest success tends to come when the investor sticks to a clear-cut set of rules.
Wishy-washy rules like “A part of my investment should be real estate” and “I’ll think about selling if the value starts to drop” aren’t good enough – set specific values for how much of your portfolio should be a given investment and set specific rules for when you want to sell.
However, because of the amount of time, knowledge and skill required to do this successfully, many people opt to use a discretionary investment management company instead. Your portfolio manager will still follow a clear set of rules over your investment mandate, though the individual buying and selling of investments will be done entirely at the portfolio manager’s investment.
Set yourself realistic ROI goals
Everyone wants the highest possible ROI for the lowest possible risk. Unfortunately, with minimal risk comes minimal rewards, and vice versa. If you’re looking for safe investments that guarantee a return of 12% or higher, you’re going to be disappointed – those kinds of investments simply don’t exist. If you only want safe investments that’s one thing, but don’t expect a massive ROI. Set yourself objectives and a realistic time horizon before you start investing your money.
Invest early
Starting early is one of the best ways to build wealth. Investing for a longer period is widely considered more effective than waiting until you have a large amount of savings or cash flow to invest. This is due to the power of compounding.
Compounding is the snowball effect that occurs when the dollars you earn investing generate even more earnings. Essentially, you grow not only the original amount you invested, but also any accumulated interest, dividends and capital gains. The longer you are invested, the more time there is for your investment returns to compound.
Diversify Your Portfolio
Diversification is the principle of not putting all your eggs in one basket. In investment terms, it is a strategy to reduce the overall risk of a portfolio by investing in different asset classes such as cash, bonds, shares, or property, that do not all move in the same way relative to the market.
Different asset classes display different levels of volatility/risk and offer different potential returns. For example, in the long-term investors can typically expect higher returns from equities (shares) than from other investments such as cash.
But higher returns tend to be riskier. In the case of equity investments, investors may run the risk of capital losses in the short-term. The returns from one period to the next may also be highly variable (volatile), which also contributes to the riskiness of equity investments.
