A common man puts money aside for the long term for the bad days. The key for investment is the long-term investment and key to financial success. If you will not invest wisely, then you will left nothing after a lifetime labor. You are not required to invest your money anywhere but need to be smart enough to invest your hard earned money wisely and increase your wealth.
Below we are discussing the basic rules for investing your money wisely.
Rules for investing your money wisely
- Valuation matters- Whatever investment method you select, it is essential not to overpay for getting good returns for future growth. Follow a bottom-up strategy with a disciplined approach on the basis of company fundamentals to recognize the right stocks for the portfolio. Putting your money in a good stock at a best price is better as compared to invest in a reasonable stock at a best price.
- Focus on real rate of return- Taxation, inflation, and charges are three factors that affect the real rate of return on investment. There are some options that can decrease costs like index-linked bonds or commercial property holdings, where rent increase with the rate of inflation.
- Spread your risk- A portfolio with a low level of correlation help to diversify the risks linked with investing in individual assets. Bonds, shares, property and cash react differently in different conditions and getting more than one asset help to ensure that your investments will not all rise or fall at the same time. Long-term investing and geographical exposure are other methods of spreading risk. Investing in vehicles also remove the difficulty related to manage a broad portfolio. The investors must aim for the risk level that they are comfortable with.
- Don’t go with the flow- You must have seen the great effect in 2008 after the collapse of Lehman Brothers that unexpected news flow can have a substantial effect on the performance of stock market. Also, there have been times when highly cash-generative have been hit by the negative sentiment that has led to decreased price of stocks and fluctuations in the market.
- Invest in what you understand- A well- constructed portfolio produce a healthy return and the contrary is also possible. It is easy to suffer permanent losses by investing money in an asset that behaves in the unexpected way. Investors must set aside time to understand and try what they want to hold.
- Have a clear Investment objectives with a realistic plan- Whether you have short-term requirement to take a vacation or buy a car, needs to fund college education or long-term requirement to manage the retirement income, your aim must be clearly stated. You should have a realistic plan and don’t assume unreasonably high investment returns without understanding the unreasonable risk. The savings and time horizon should be sufficient to allow safe and steady compounding of your assets.
- Achieve a correct Balanced Portfolio- You must not have all of the assets in any one kind of investment and must diversify broadly. You must not invest all in stocks, all in real estate, all in bonds, or all in cash. Even with a small portfolio it must spread in several investment types to protect the assets and reduce your risk.
- Ensure Diversification of Stocks- The market do not reward investor for taking unnecessary risk. Recent studies have demonstrated that many times the number is necessary for sufficient diversification. The problem can be largely overcome by investing in a diversified mutual fund. It is wise to own various diversified funds with different objectives and management.
- Let Time Horizon Dictate the Investment Vehicles- If you are investing for less than a five-year you must not invest in stock market as you have to sell them when the stock market is down. It is better to invest in short-term bond funds or money market funds.
- Carefully choose the Best Investments- Fund selection should reflect the overall investment objectives and level of risk tolerance. Don’t buy funds as they are fashionable or exciting and don’t buy anything that is complicated. Do your research and read prospectus. Don’t just buy anything as someone is trying to sell it to you.
- Objectively Manage the Investment Portfolio- Any business require good management. Allocate the regular time monthly to tackle your business. Good portfolio management needs patience and discipline. Stick to the chosen strategy. Use an automatic system of decision that allows you sell, buy or switch as per set of rules that you have adopted. Otherwise the decisions made will be influenced by short-term random movements. Manage your emotions of fear and greed and beware of hasty decisions made on the basis of financial news.
- Understand the Long-Term effect of Inflation and taxes- The combined impact of taxation and inflation is the insidious and enemy of the investor. Most of the people tend to ignore it as it is not as dramatic but it is far more serious. Over time, the market bounce back, but losses due to inflation and taxes will be repeated again year-after-year. Unless the investment returns are adequate to this effect, the portfolio will suffer constant erosion of purchasing power.
Hence, follow these basic rules, and you will be on your way to investment success. Invest wisely as per these rules.