Primary Level Basic Investment Concepts and Strategies
People should start investing only
after knowing Primary Level basic
investment concepts and strategies. Idea is to have sufficient know-how of
investment before indulging in them. When the time
comes, making wise investment decisions
needs sound investment knowledge. In this article,
we will list few basic investment concepts and strategies that really help 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 an 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.
Forget
Jargon’s, Develop Own Investment Vocabulary
Eliminating jargon’s and using easy
words/phrases will help 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 have simple explanations. Even better will be
to understand jargon’s based on examples. Investopedia.com is one website that explains all Jargons very
well. Practicing investment is important, but developing a sound investment
vocabulary ensures success.
Stop
Investing in Options that are not Investment Options
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 a 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 the goal is to have
funds after 15 years for child’s future then the equity-linked plan is more suitable. If one does not want to take a
lot of risks, balanced funds are very
good options. Insurance can best be categorized as savings schemes (not
investment option). Returns from insurance hardly beat inflation. Please must do financial need analysis before
selecting an investment option.
Practice
Value Investing
Generally, we buy stocks on the 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 the 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.
Diversify
Investment Portfolio
If you ask Warren Buffett, he will
not agree to diversify a portfolio. But
for a common man who has limited knowledge about stock investment should follow
the diversification approach. A diversified investment portfolio offers less risk. In fact,
diversification of portfolio shall happen automatically. Everyone has financial
goals whose realization happens differently. Short term goals get realized
between 0 to 3 years. Medium term goals get realized between 3 to 5 years. Long-term goals whose realization take more
than 5 years. Depending on the realization 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.
High-Risk
High Returns, Low-Risk Low Returns
All of us would love to earn high
returns with a 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 ask 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 the
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”.
Investing
for Growth or Income?
Majority of investors do mingle these two objectives. If one is
investing for income then they have a separate
set of investment options. Income investing calls for different investment
approach. Here the investor is more careful and defensive. When such investors buy 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 than its a mistake. Growth investing requires long-term holding. Above average long-term growth will only come from high-risk options.
Let
Money Compound
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.
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