Whether you want to get rich or just save up enough money for your children’s education or your own retirement, investing is one of the most common ways to do it. However, investing isn’t just about buying and keeping. Making profits without losing savings might be much harder than you thought. Here are some basic principles of investment that can help you in the beginning of your journey.
#1 Set Goals
First of all, knowing what you want helps in defining your expectations, set clear milestones and objectives such as make $1000 in 3 months, then make $5000 in 4 months, etc. It’s a purely psychological, but very important element.
Second, a clear goal defines your strategy, defines preferable asset class, the term of investment, etc.
#2 Choose the Right Asset Class
All assets are different and suit different goals and objectives. For instance, bank deposits offer very low interest rate that hardly exceeds the current inflation rate. So trying to make money on such assets is of little use. But on the other hand, bank deposits carry almost no risk.
Real estate investment carries moderate risk and offers moderate return on investment. Stock market can bring you very good income, but losing all your savings here is quite easy. There are other asset classes as well, and each of them has its own pros and cons.
The general rule here is the better the returns are the riskier it is to invest.
#3 Always Diversify Your Portfolio
- Diversification is one of the most important basic principles of investment. Since any profitable asset carries a certain degree of risk, it is too dangerous to keep all your money in one basket. Here are the methods of diversifying your portfolio:
- Invest in different assets within one category: buy shares of different companies, buy several cheaper properties instead of an expensive one, etc.
- Invest in assets of different classes and types: buy shares of companies working in different industries, buy different types of property instead of several properties of the same class, etc.
- Invest in different markets. If possible, don’t put all your money in one country. Instead, buy properties in different markets, buy shares of companies situated in different countries or even regions, etc.
- Combine the above.
#4 Consider the Terms of Investment
Certain types of assets (such as property, for example) may bring considerable profit only after many years from the initial investment. Starting investors often find it hard not to lift a finger when prices go down or something goes wrong. Constant attention might be a good habit when you deal with short-term investments, but long-term work requires that you stay calm and wait. So learning to ignore short-term fluctuations in some cases and to react quickly in others is very important.
#5 Know When to Quit
There are no investors who never lost their money. Investing is a risk and one must not forget it. Sometimes the asset you own stops bringing profit and becomes a lossmaker. Although there might be ways to improve the situations, the worst thing you can do is trying to keep it even when it’s clear that nothing would work. In these cases, it’s time to admit your failure, sell the asset for whatever price you can get and move on.