What Every Investor Should Keep in Mind
Investing is a term that many people associate with large sums of money, but nothing could be further from the truth. Among other things, investing is associated with assets (like homes for example) and savings, both of which people aspire to for security reasons, peace of mind and the future. Investment requires a build-up of money over time, in many cases a little bit at a time. This is essentially what investment is: the build-up of assets over time, often in small manageable amounts. Therefore, anyone can be an investor especially if we are speaking about the long term.
“This is essentially what investment is: the build-up of assets over time, often in small manageable amounts. Therefore, anyone can be an investor especially if we are speaking about the long term.”
There are many lists published about investing, including the “Dos and Don’ts” and we have picked out a few which we believe are pertinent, especially for a new investor:
- Don’t Invest in a Vacuum. Don’t invest for the sake of investing. It is best to have a goal in mind, such as purchasing property, children’s education, retirement, etc. In that way, you can plan the figures to suit the goal, and more importantly, you can measure how close you are to the goal and how much more is required to achieve it. You may hear industry experts speak of Time Horizon, which refers to the time frame you are looking at to achieve that goal.
- Investing Involves Risk. Any investing involves risk, and it is really a matter of knowing the risk involved with any particular investment and understanding the ways you can reduce it. Determine what level of risk you can handle or absorb. This is known as your Risk Tolerance. It is not always straightforward to identify or measure risk. For example, most people would consider that money in a bank is probably the safest bet. While that is generally true, most people do not consider the risk of inflation that can reduce the value of the funds if the interest rate offered is lower than the inflation rate.
- Risk versus Reward. Typically, the higher the risk the more the reward. Having said that, it is not necessarily wise to chase high yielding investments just because they offer a higher return without first ensuring that you can handle the higher risk. Again, you need to understand your risk tolerance: are you comfortable pursuing higher returns with the likelihood of higher risk of losses and gains (or volatility) along the way or do you seek a smaller but steadier return (with less volatility)?
- Diversification and Asset Allocation. Put simply, don't put all your eggs in one basket. It is always a good idea to spread risk and/or diversify your investment portfolio to achieve a good balance of risk and reward. Ideally you should have a mix of investments over time: ranging from lower risk, quickly accessible investments (for short term goals) through to higher risk, longer time horizon investments for long term maximum return (on longer term goals).
- Investment Requires Patience. Usually, investments are for future longer term goals and therefore any short term gain or loss should not necessarily be a cause for concern. It’s important to keep your eyes focused on the original goal and to what extent fluctuations affect the long term goal at that time. For example, one goal of getting $20,000 towards a down payment on a house in a year’s time vs $50,000 for the first year of your child’s education in 5 years time. In the first example, you may be more concerned about short term fluctuations than in the second.
- Early Redemption or Cashing in your Investment. Make sure you know your options because sometimes this is necessary even before the objective has not been achieved. For example in case of a medical emergency, by all means do so if the need is there. One consideration in early repayment is the impact of taxes, where this is applicable.
The above is by no means an exhaustive list, but merely a few which may be of interest, particularly for new investors. The main thing to remember is that investment does not have to be about significant sums of money and often is about an incremental action towards a specified goal at some point in the future. Keep in mind that there is always risk in investing, but there are ways to mitigate that risk and one of these ways is to diversify or spread the investment.