The record low level of interest rates prompted you to look for more risky forms of capital multiplication. You focused your attention on the stock exchange, but you do not know how to find yourself in the crowd of data and information flowing from it. It does not bother you – every investor, even an experienced one, found himself in a similar situation. Start your adventure by learning the basic principles and rules governing the capital market.
Efficient movement in the world of financial indicators and market data is not easy, especially when we are just beginning our adventure with investing. At the beginning, let us try to assimilate a few principles that will make it easier for us to make the first important decisions related to the investment of our capital. Achieving investment success is a tedious and time-consuming process, for which we need to prepare ourselves properly.
Get to know yourself – an investor
Understanding one’s own financial situation at a given moment and determining an individual approach to investment risk is crucial for making any investment decision. Based on these two factors, you need to define your financial objectives and the types of investments that will achieve them.
When formulating your expectations for any investment, realistically estimate the rate of return you intend to achieve. Remember, however, that past performance shows only past profits and there is no guarantee that they will be repeated in the future. It is impossible to predict future market conditions, therefore, before determining your expectations, you should follow, among others, the history of long-term and short-term results, results obtained in different market conditions and in relation to similar types of investments.
In the information, strength
The information will make you better prepared to make investment decisions. Ask as many questions as possible, after all, it’s about your hard-earned money. Always make sure you have all the necessary information and understand it before making any decision. In order to do so, it is worth answering a few questions:
Do I have all the information about this investment?
Does this investment fit my investment goal?
Do I understand the risks associated with this investment?
What are the costs associated with this investment?
What is the liquidity of this investment?
Is the investment justified?
What is the level of transparency, service and communication?
First develop a general plan and then choose specific investments.
Work out a financial plan at the beginning and then select the investments that fit the plan. Such a strategy is better than ad hoc investing or reacting to changing market conditions.
Different investments work well in different time horizons
Remember to match your investments to the time horizon in which you intend to achieve your investment goals. For long-term goals, such as retirement or children’s education, choose equity funds that are more volatile in the short term, but more effective in delivering the long-term growth we expect. For short-term objectives, opt for money market funds rather than money market funds.
6. Get professional financial advice
Due to the wide range of possibilities available, it is worth considering using the services of a financial advisor. Almost every type of investment involves a specific risk, which should be discussed with an experienced expert. In addition, every investor has his own unique investment goals, therefore the individual selection of optimal products is of paramount importance to achieve investment success. An experienced financial advisor knows how to define individual financial objectives, acceptable risk level and develop an asset allocation plan that will enable the achievement of these objectives. He will also advise on issues related to pension plans and assess the potential risks and achievable returns for various types of investments.
Diversification pays off
“Don’t put all your eggs in one basket.” This saying best illustrates one of the basic principles of investment, which is the need to diversify our investment portfolio. Different asset classes and sectors rarely see fluctuations with the same vectors, so it is important to ensure that increases in some areas compensate for decreases in others by spreading your capital across different types of investments.
Understand the relationship between risk and return
Each investment involves a specific risk and usually returns on investment are commensurate with the risk. For example, equity funds often bring solid returns in the long run, but before you invest in them, you need to answer the question whether you can accept a strong fluctuation.