Basics of Investing
We believe that investing can be fairly simple, once you understand some of the most important concepts. In this section we endeavor to educate current and potential investors on the practice of investing from the ground up.
- What is investing?
- What investing is not
- Why bother investing?
- Understanding your needs
- Types of investments
It’s actually pretty simple: investing means putting your money to work for you–actually, it’s a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And so that’s what most of us do. But there’s a limit to how much we can work and how much money we make out of it–not to mention the fact that having a bunch of money is no fun if we don’t have the leisure time to enjoy it.
So, since you cannot create a duplicate of yourself to increase your working time, you need to send an extension of yourself–your money–to work. That way, while you are putting in hours for your employer, sleeping, reading the paper, or socializing with friends, you can also be earning money elsewhere. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime, or look for a higher–paying job.
There are many different ways you can go about making an investment. This includes putting money into stocks, bonds, mutual funds, real estate, gold etc. The point is that no matter the method you choose to invest, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it’s the most important concept for you to understand.
Investing is not gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a ‘hot tip’ you heard from your colleague is essentially the same as placing a bet.
A ‘real’ investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping luck is on your side.
Based on your objectives, their investment horizon and your risk profile, we will help you identify an ideal asset allocation strategy for each of your goals. This means, for each of your goal to be achieved in what types of asset classes you should invest in.
Generally, the longer the time you have to achieve a certain objective, you can invest a larger portion of your money in considerably riskier investments. Similarly, the less time you have to achieve your objectives, the less proportion of your money shall be invested in risky assets.
Obviously, to earn more money.
However, investing is becoming less of an extra thing to do and more of a necessity. For the average person, investing is the only way they can retire and yet maintain their present standard of living.
By planning ahead you can ensure financial stability during your retirement.
Even though all investors are trying to make money, they all come from diverse backgrounds and have different needs. Therefore different types of investment solutions and methods are suitable for different types of investors. Although there are many factors that determine which path is optimal for an investor, we will look at three main categories: investment objectives, timeframe, and your personality.
Generally speaking, investors have a few primary objectives: safety of capital, current income, or capital appreciation. These objectives depend on a person’s age, stage/position in life, and personal circumstances. A 65-year-old widow living off her retirement savings is far more interested in preserving the value of investments than a 33-year-old business executive would be. Because the widow needs income from her investments to survive, she cannot risk losing her investment. The young executive, on the other hand, has time on his or her side and can therefore risk losing his money simply because he has time to make more money
An investor’s financial position will also affect his or her objectives. A multi-millionaire is obviously going to have very different goals compared to a newly married couple just starting out.
As a general rule, the shorter your time horizon, the more conservative you should be. If your investment is for a long-term objective like retirement planning and you are still in your 20s, then you still have time to make up for losses and can therefore invest in aggressive investment vehicles like stocks. At the same time, if you start when you are young, you have the power of compounding on your side.
On the other hand, if you are about to retire, then the opportunity to recover losses on your investments is limited and therefore it is critical to invest your assets conservatively.
When investing, you need to know how much volatility you can stand to see in your investments. Figuring this out is difficult; but there is some truth to an old investing maxim: you’ve taken on too much risk when you can’t sleep at night because you are worrying about your investments. This is an indicator of your investment personality.
Putting it all together: your risk tolerance
By now it is probably clear to you that the main thing determining what works best for an investor is his or her capacity to take on risk.
The core factors that define your risk tolerance are:
> Investment Objectives
> Your personality
Types of investments
Grouped under the general category called ‘fixed-income’ securities, the term ‘bond’ is commonly used to refer to any form of investment founded on debt. When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out.
The main attraction of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed (or “risk-free” in investing terminology). The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other securities.
When you purchase stocks (or ‘equities’), you become a part owner of the business. This entitles you to vote at the shareholder’s meeting and allows you to receive any profits that the company allocates to its owners–these profits are referred to as dividends.
While bonds provide a steady stream of income, stocks are volatile. That is, they fluctuate in value on a daily basis. When you buy a stock, you are not guaranteed anything. Many stocks don’t even pay dividends, making you any money only by increasing in value and going up in prices – which might not happen.
Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume the risk of losing some or all of your investment.
A mutual fund is a collection of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which in turn enables you (as part of a group) to pay a professional manager to select specific securities for you. Mutual funds are all set up with a specific strategy in mind, and their distinct focus can be nearly anything: stocks, bonds, debt, stocks and bonds, gold, and the list goes on.
The primary advantage of a mutual fund is that you can invest your money without needing the time or the experience in choosing investments.