Great! So you are ready to step into the world of investments. Everyone around you is giving you advice on where, how, when to invest and you are trying to grasp all of it. So you are the perfect stage to hold yourself back for a minute, take a deep breath and understand the 5 basic principles of investing. This will help you in having the right expectations, avoid disappointment or disillusionments
Your investment plan should depend on your current situation, your future goals, and your personality. If you don’t consider these, and make them explicit, you might be headed in the wrong direction.
- Current Situation: How healthy are you, financially? What’s your networth right now? What’s your monthly income? What are your expenses (and where could they be reduced)? How much debt are you carrying? At what rate of interest? How much are you saving? How are you investing it? What are your returns? What are your expenses?
- Goals: What are your financial goals? How much will you need to achieve them? Are you on the right track?
- Risk Tolerance: How much risk are you willing and able to accept in pursuit of your objectives? The appropriate level of risk is determined by your personality, age, job security, health, net worth, amount of cash you have to cover emergencies, and the length of your investing horizon.
Just so you know there are professional financial planners who can help you with these, if you are unable to put it together yourself.
Time and discipline is the most powerful force in investing.
We have learnt it in school, we teach our children too, time for us to implement it. Einstein called ‘Time’ the most powerful force in the universe. The longer the investments are for, the more chances of gaining from it. Again, don’t stop with just that, keep investing regularly, almost like paying your utility bills. Keep aside a set amount for investing on a monthly basis. As Warren Buffet said, “Don’t save what is left after spending, but spend what is left after saving”.
Focus on your goals and not on the market
So you are cutting back spending your wealth now in order to invest for the future. That goal must be really important that you willing to sacrifice today’s spending. So keep that focus, this way you are more likely to save and also achieve the goal. What could be the possible goals? Well it could be anything, right from that educational course abroad that you always aspired for or a dream holiday abroad, diamonds, that expensive musical instrument, children, car, etc. endless possibilities. I truly believe that this approach helps you dream, takes you to closer to achieving your dreams. All it requires is focus. Markets can fall, rise, does not matter, it’s anyway not in our control. So why bother? What’s in your control is saving and investing, so just keep your head down and invest in your goal, your dream.
Don’t put all your eggs in one basket. The best way to reduce risk is to diversify. Basic, isn’t it? That said you shouldn’t diversify in bad investments. Ensure that you have a good mix of high and low risk investments depending on your risk taking capability.
Understanding your investment performance
Your investment should help you create wealth over a period of time. If not, it should at least, achieve the basic purpose of preserving your capital. It means that your investment should more than outpace inflation. Inflation varies but on average it is about 4% growth each year. If you invest you will want to make sure you are making at least 4.25% or more on your money each year.
I sign off hoping that you now have the right expectations from your investments and have a wonderful journey.