Investments play a vital role in creating financial stability and adding muscle to your wealth portfolio. The more you can invest today, the stronger financial future you can create. To make smart investment decisions, you need to understand a few investment concepts and principles.
- Educate yourself about investments and ensure you understand the basic concepts:
- Compound interest – earning interest on interest.
- Risk and Return – risk is defined as the uncertainty that an investor is willing to take to realise a gain from an investment knowing that a loss can be realised as well. Low risk is generally associated with lower returns and high risk with higher returns.
- Risk profile of an investor – the level of risk an investor feels comfortable with.
- Liquidity – how easily you can access your money or convert it into cash.
- Investment period – investment products either have a shorter or longer term period attached to it.
- Diversification – by investing your money in more than one investment type (for example cash, property, shares, endowment policies, etc.) or more than one fund you spread / minimise the risk.
- Do proper research to understand the different investment options, products and platforms. Understand the fee structure, requirements, and penalties for early withdrawal as well as the fine print in the contract.
- Don’t invest for the sake of investing or because you heard from somebody else who had a good experience about the investment product. What works well for somebody else might not work for you. Ensure that you choose an investment that caters for your needs
- Start small. It is a myth that you need lots of money to start investing. Look for investments with no or smaller minimum investment requirements and start building up your funds till you can invest in more sophisticated products with higher minimum investment requirements offering higher returns;
- Investments take time to mature and render healthy returns. You need time for your investments to reach maximum growth and returns. A longer investment term yields higher returns and maximises compound interest returns. Investments are less impacted by market volatility over the long-term;
- Whenever you have excess cash available, transfer it out of your day-to-day bank account to an investment account. You receive very little interest on money in your day-to-day bank account and you will be tempted to use it;
- Be willing to take some level of risk. If you don’t have excess money and are not willing to accept the risk of potentially losing it by investing in high risk investments, then rather stick to investment options with lower to medium levels of risk. If you are knowledgeable about the investment options and financial markets, you will feel more comfortable to take calculated risks. By having proper financial knowledge, you can manage the level of risk downwards;
- Ensure you have a suitable, diversified investment portfolio;
- Be disciplined. Be diligent and invest on a regular basis. Don’t be tempted to spend your investment money. Be patient and don’t panic when markets are going down, as they will recover;
- Monitor your investments on a regular basis. Look for alternative investments if your investment is no longer performing. Know what is going on in the financial world, news, politics and economy and how this could potentially impact your investment decisions; and
- Understand what the tax implications of your investments are and budget to pay those taxes. Investors often forget to take taxes into account when making investment decisions. The tax implications can make certain investments less attractive.
Start building your investment portfolio today.
This article contains extracts from the book ‘Financially Fit and Wealthy’. To learn more about the book – click here
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