Friday, December 30, 2011

Simple investment tips

Investment tips are often the simplest ones - and yet, it's amazing how many people overlook the basics.

Understand why you want to invest

Investment is not an option it is a necessity. People do investments to meet their financial goals. Everybody has their own personal financial objectives of life.

Investing is a way of using money to make more money. Investment purpose mainly centres on financial security since you cannot be assured that you will be able to work forever, and more people don't want to. It is a way of making sure that even after retirement you still have a source of income that will sustain your way of living. There are risky as well as risk-free investments, and with any investment where risk is involved, you'll either loose or gain money.

There are many types of investment that you can choose from, and one example is stock investment. Investing in stocks is preferred by many people because it may give higher returns much quicker when compared to bonds and real estate. If you hold a stock for a year or more before you decide to sell it, instead of paying your standard rate, you'll only be taxed 15% which is a long term capital gains rate. It is also easy to diversify provided that you invest in a variety of stocks. This way, it will not create a very big impact if only some of those investments go down.

Know your risk taking capability from the start

Investment tips are based on assumption that an investor knows his risk taking capabilities.  Let us take an example; a person earns around $1000 per month and is able to save $300. Ideally his risk taking capability becomes $300, but it is not always like this. Out of $300 he has observed that in some months he needs to take around $80 from this savings. Means his risk taking capability is reduced to $220($300-$80). He has also observed that he needs to keep at least $50 as his cash reserves (cumulating) each month for contingency. Hence his risk taking capability becomes $170 ($220-$50). This $170 is that money that even if it gets stolen (worst case scenario) it will not affect his living standard. Once one knows this figure ($170), this becomes his ultimate risk taking capability. There are people for whom this figure is in negative; such people should not venture into stock market investments. But very often the reverse is true, only such people (who has no spare money) puts their hard earned money into stock market for making quick bucks. Therefore, you should understand your risk capacity before deciding on your investment. 

Sources of investment tips

In fact, you will be amazed that investment tips are obtainable all around but it takes personal effort and savvy to discover them. Investment tips are available at the marketplace; the daily news papers, news media, online advisors, banks, post offices, family, foes and friends alike. With every investment opportunity, it is up to the individual investor to consider what area of investment and how best to carry out this activity.

Many  useful books are written in a very lucid and simple way so that even a layman can understand. As a beginner you can start your investment exercise by studying those books. These books will provide you with fair idea about stocks, bonds, shares, dividends and all financial aspects which are important to investing.  

For instance, if you are indeed interested to invest in the real estate sector and earn money, to begin with, you can look out for a job in the real estate sector. This will provide you with ample insights about the real estate market. Once you gather sufficient knowledge about the real estate industry, you can start the humble beginning to invest in the real estate sector. So, all these tips boil down to a single thing, which is 'education'. Only proper knowledge about the industry as well as the company, in which you are investing in, can make you a successful investor.   Gaining knowledge is one of the best ways you can help yourself grow as a person.

If you are to invest in stocks, your stock market fundamentals must be straight before you start using investment tips via this route. Stock investment has always been fraught with rumours related to risks involved with stocks market investments. But it must be understood that risk level in stock investment is a result of ‘uninformed and unplanned’ decision. However, a good investment strategy will pay returns year after year. Usually the buy-and-hold, long term strategy investment, as advised by  Warren Buffet   may be your best bet. Do not get caught up in the “hot tips” lifestyle, you cannot afford to get burn, not even once in your lifetime. Buy stocks with fundamentals, the ones you can hang on to for long term with good dividend yield. Avoid penny stocks that can give you high percentage of earnings but with no solid hold. Use your head not your heart whenever investing is concerned.

Diversify through investment options

 After you have gained sufficient knowledge on investment strategies and determined your risk taking capability based on your investment goals, various investment options are available in the market on basis of these goals:

  • Investing for safety (high liquidity) – like bank deposits, money market mutual funds etc
  • Investing for income – Companies deposits, Government Securities (G-sec) and  Treasury Bills (T-bills), preferred stocks etc
  • Investing for growth – Domestic and overseas stocks & equity mutual funds
  • Investing to fight inflation – Gold, residential real estate, bonds etc.
 Knowledgeable and well informed investors excel in between the group of average and mediocre investors simply because they are aware of the various investments options available at their disposal. Investors can pick their options depending upon their investment goal with respect to time and their risk taking capability. Investment options that offer low risk produces lower returns; and options which can give high returns carries high risk. In other words, the lower the risks, the lower the returns while higher risks investments will bring high returns. Different investment options offer various levels of risk. Investors can choose the investment options of their choice depending on the level of risks they can take. Investment market of today provides many investment products like stocks, bonds, fixed deposits, debentures, gold/silver, real estate etc.

Useful guide to keep in mind is that nobody can eliminate financial risks completely. The idea is to mitigate these risks.  For instance, in my earlier analysis above, if the investor’s risk taking capability of $170 is available for investment,  it should be invested across various investment products and not one in order to maximize his profit at maturity. This is what diversification does to mitigate financial risks.

In conclusion, you have to plan an investment strategy so that you can choose from the available investment options based on your initial goals. Keep in mind the investment advice set out above. Never invest capital required for your survival. Invest only that money that you can afford to lose completely.

To your success,

Ayodele Ojo


Anonymous said...

Many thanks for your words of financial education.

Infoworld said...

You are very welcome. I am happy that you find the information to be useful.