Before you even start thinking about investing your surplus, it is essential to answer these two fundamental questions.
- “How should I invest?”
- “Why should I invest?”
If you don’t know how to invest, first you will need to learn some basics about the investment options that are right for you and how you can efficiently manage your investments in the market.
However, if you can’t find an answer to the reason, you’d better stay away from any market-related deals.
What drives people to invest?
It’s easy to indulge in the dizzying fascination of this market and invest in a few fancy stocks with the dream of making a fortune overnight. Still, if you let your more rational side prevail, you’ll realize sooner rather than later, It’s just a recipe for disaster.
Does this mean that the stock markets are not intended for the average investor? The answer is no. You only need to have the right reason to invest if you are looking to get the most out of your investment. The next question that arises is why wanting to make a quick profit is not a good enough reason to invest, and the answer is that it is not called investing, but gambling or speculation.
What should you do with speculation?
You should avoid speculating at all costs if you are considering investing in the stock market. Now, what constitutes speculation? You buy a lottery ticket, and you go home dreaming about all the things you can buy and the things you can do with the prize money and the next day you wake up to see your dreams evaporate into thin air, well most of it.
Buying shares without knowing much about the company that the shares belong to, the nature of their business or the market situation is nothing more than speculation or risking your money.
Avoiding investment mistakes
Many people make this mistake and invest in something that “is sure to produce impressive returns in two months, weeks or even days,” according to some self-proclaimed market experts. It’s also common to invest in something just because everyone else is doing it. That is called herd mentality. That is precisely the kind of thing to avoid because there don’t need to be many reasons why everyone is running for a particular stock.
By the time things are the same, many people end up losing their accumulated savings in their life simply because of his excessive focus.
That is not to say that experienced investors do not face any recession or incur losses, but what sets them apart from others is that they tend to follow a well-defined strategy to reduce their losses. They invest to achieve profitable long-term growth to help secure their financial future, and this helps them take a more realistic approach to the idea of investing.
Before buying stocks, they study what the company is doing, what services it offers or the type of products it makes, and the market it serves. Future growth prospects for this type of product or service can give a clear idea of how stocks are likely to perform.
Risk assessment
To effectively plan your money and investments, you must be able to understand and estimate risks. That is not as simple as your money-back opportunities, as you must consider many other aspects, such as fluctuations in the value of your portfolio, inflation costs, and interest rates.
This publication covers how we assess and manage your attitude towards investment, pension and savings risks.
What do you mean by “investment risk”?
In simple terms, this is the amount of risk you are willing to take with your money. That will depend on your goals, the amount of time you need to invest, and your caution. The general principle is that the more willing you are to take a risk, the greater the potential returns (although, of course, nothing is guaranteed); The opposite also is true. Along with risk comes volatility: If you take a riskier approach, to try to get higher returns, you should expect more short-term fluctuations in the value of your investments.
Why is risk substantial?
You must understand the level of risk you are willing to take, as this should affect your final expectations. If the thought of losing capital keeps you up at night, you are probably high risk-averse. For example, if you are saving for the short term, it may not be appropriate for you to invest your money in assets that can lose money.
Of course, you should also lower your expectations because “safer” investments tend to underperform. Other aspects should be considered, such as your level of investment experience.
How do we assess your risk tolerance?
You probably have a good idea, think about it, and that will play a significant role in your decision. We usually start with a short questionnaire to help assess your feelings on some of these crucial topics. That helps prevent some people from being attracted to “moderate” risk.
This questionnaire then allows us to do a more scientific analysis of your situation. We can then discuss what this means with you and re-watch once you are satisfied with the result.
Diversification
One of the most critical aspects of risk is the concept of diversification. The idea is that if you avoid putting all your eggs in one basket, you can reduce your risk. If you think about it, if you invested all your money in a company and that company files for bankruptcy, you will lose 100% of your investment; If you had invested in 50 companies, you would only lose 2%. We apply this principle to create a portfolio that matches your risk attitude.
The idea is to spread the risk by maintaining multiple investments in multiple sectors. So you likely have investments in some “safer” areas, like cash and bonds, and some in “riskier” areas, like stocks and properties. We will then distribute this across geographies so that you gain greater exposure and increase the spread of your risk.
The idea is that since one investment category is not doing well, others will do better. Over time, this should mitigate your risk and give you more stable returns. That is especially important because it is nearly impossible to predict which types of assets will perform best at any given time. The portfolio you leave will reflect your risk position. Therefore, if you are avoiding risk, you will have more “safe” type of assets. If you are comfortable with risk, you will have more “risky” asset classes.
Check your portfolio
You probably have maintenance for your car or boiler every year, because you realize that if you don’t, it will probably mean that it will malfunction at some point. We recommend the same with your portfolios to ensure that your investment continues with the right level of risk and well-performing funds.
The next chapter: Step 7 – Retirement Management