Thinking of Stepping Into Investing? Have a Look At These Tips First
If you’re reading this, we probably don’t have to tell you how tricky the investment field can get. From finding the right asset to invest in to keeping updated with everyday market swings, it’s pretty mind bending. And things can get extremely confusing when you’ve just started out.
While you might’ve heard time and again that reading and researching can help you succeed, experts believe that you also need to acquire a lot of domain knowledge, which only an experienced financial advisor can give.
So to help you get a little bit of insight into the field of investment, we’ve gathered the following tips from money gurus that are sure to clear a lot of your doubts. Have a look.
Get familiarized with Compound Interest
Let’s try to understand compound interest the simple way. Consider a small snowball as your first investing sum. As you keep rolling (investing in) the snowball, with time it starts to become bigger. The same analogy applies to wealth. If you want to outgrow your wealth, you need to keep investing in the long run.
Understand the difference between price and value
We often use the terms price and value interchangeably, especially when we’ve just started investing. But it’s important to realize that they’re not the same. Suppose you invest 20 percent of your savings on very low-priced stocks; so low-priced that any movement can double, triple or quadruple your return.
However, a day comes when the stock becomes delisted because there’s no value in it. In such a case, you can lose your investment in one shot. Hence, instead of looking at what the market quotes a stock at, try to see what it’s intrinsically worth.
Analyze the risk-reward ratio
It’s often said that the higher the risk, the higher the return. But it’s important to make sure that you’re comfortable with the risks you take. Let’s consider an example. You may agree that making a 10 percent net gain on your investment is a good return. But what if the risk you’re taking could land you in a 30 percent loss of capital? The reward risk ratio, in this case, is 1:3. So the real question to ask here is, are you willing to take that much of a risk?
Choose diversification over concentration
If you keep your investment portfolio concentrated in only a few assets, your returns will undoubtedly be significant. But what if the assets you choose aren’t correct for you? In such a case, your portfolio will be negatively impacted. Thus, it’s important to diversify when it comes to investing. Diversification reduces the potential risk and volatility of your portfolio. Even if a few investments turn out to be dud, the remaining assets help compensate.
Summarizing it up
If you’re just starting your investment journey, the above concepts can help you avoid making novice mistakes. Our advice would be to start small and early. With a long investment horizon, you’ll surely get your fundamentals right.
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