People should start investing only after knowing basic investment concepts and strategies.
Idea is to have sufficient know-how of investment before indulging in them.
When time comes, taking wise investment decisions needs sound investment knowledge.
In this article we will list few basic investment concepts and strategies that really helps while investing.
These concepts/strategies are both understandable and easy to apply.
Investment of money is a very logical activity.
But unfortunately, difficult investment-jargon’s and wrong interpretations have made it look like a Einstein’s theory.
If one can follow investing from basic concepts, making money will be a piece of cake.
Starting at right time selecting right options will do the trick.
#1. Develop you Own Investment Vocabulary
Eliminating jargon’s and using easy words/phrases will helps understanding investment better.
When someone talks about ‘investment diversification’ and ‘risk-return paradigm’, do not bother if you do not understand.
Instead note down those jargon’s, Google it, and develop your own easy explanations.
All difficult words has simple explanations. Even better will be to understand jargon’s based on examples.
Investopedia.com in one website that explains all jargons very well.
Practicing investment is important, but developing a sound investment vocabulary ensures success.
#2. Everything offered is not investment
People often buy insurance, retirement plans, child plans etc.
This is not a problem, but it becomes a problem when they buy considering it as money making investment options.
Insurance schemes are not investment options.
If idea is to get long term capital appreciation, insurance is a wrong choice.
It is very important to set goals before investing.
If goal is to have funds after 15 years for child’s future then equity linked plan is more suitable.
If one does not want to take lot of risks, balanced funds are very good options.
Insurance can best be categorized as savings schemes (not investment option).
Returns from insurance hardly beats inflation.
Please must do financial need analysis before selecting a investment option.
#3. Practice Value Investing
Generally we buy stocks on advice of others.
This is not the right way to invest in stocks. Stocks must be analyzed and then bought.
Stocks analysis is basically a two step process.
- First, confirm is stock/company is fundamentally strong.
- Second, confirm is market price of stocks is overvalued or undervalued.
People must avoid overvalued stocks under all circumstances.
This is what is practiced in value investing.
It is like a crime to buy stocks without knowing about it.
Novice investors must by-heart the basics of value investing.
Value investing tells us to buy only quality stocks which are available at fair price.
#4. Diversify Investment Portfolio
If you ask Warren Buffett, he will not agree to diversify portfolio.
But for a common man who has limited knowledge about stock investment should follow the diversification approach.
A diversified investment portfolios offers less risk.
In fact diversification of portfolio shall happen automatically.
Everyone has financial goals whose realisation happens differently.
- Short term goals get realised between 0 to 3 years.
- Medium term goals get realised between 3 to 5 years.
- Long term goals whose realisation take more than 5 years.
- Depending on the realisation time, different investment vehicles shall be selected.
For short term goals high risk options cannot be selected.
For long term goals high risk options can be considered for investing.
#5. Remember: High Risk-High Returns, Low Risk-Low Returns
All of us would love to earn high returns with minimum of risk.
But in real world earning high returns is not east.
If one invests in government bonds and expects high returns then it is foolishness.
When one invests in shares (for short term) and expects high returns it is even bigger foolishness.
All high return investments asks investors to invest for long term.
And when we talk about long term we mean holding period of minimum 5 years.
Buy shares and leave it to idle for long term. We all know that high risk behests high returns.
But this statement is incomplete.
The complete statement will be “high risk behests high returns only in long term”.
#6. Know why you are investing?
Ask yourself, “I am investing for growth or for income generation?
Majority of investors do mingles these two objectives.
If one is investing for income then they have separate set of investment options.
Income investing calls for different investment approach.
Here the investor is more careful and defensive.
When such investors buys shares, he will do it for dividend income and not for capital appreciation.
Such investors will portfolio inclined more towards risk free options.
When one is carrying income generating options and expecting growth then its a mistake.
Growth investing requires long term long term holding.
Above average long term growth will only come from high risk options.
#7. Let your invested money enjoy the power of compounding
Albert Einstein Said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Compounding gives the money the power to multiply fast.
The longer the money stays invested, the faster it will multiply.
The power of compounding is the basic reason why we invest money.