Investing is something that is becoming more and more necessary as our economy changes, finances become less secure, and simply because it is impossible to know what is going to be waiting for us just around the corner. The good news is that you do not have to be a financial expert or an investment professional in order to learn how to invest your money properly. Successful investors simply learn to minimize loss and maximize gain, and here are six principles that you can learn in order to do just that.
Grow your Wealth with Long-Term Compounding
It is a great idea to start investing with the thought of a rolling snowball stuck in your head. The longer that you leave your money in an investment, the more it has the potential to grow and the more rewarding the investment can become.
Just think about this.
Investing $10,000 with an annual rate of 8 percent means that in 25 years your investment will benefit from a 47% gain and end up equating to $68,485. This is assuming that you make no withdrawals and simply leave your investment as is.
Better yet, wait 30 years and that same $10,000 will have turned into $100,627.
It’s easy to see how lenders end up making a lot of money, isn’t it?
This is just a simple and easy to understand example and doesn’t factor in taxes and other factors, but it is a powerful illustration of the benefits of long-term compounding. As long as you have time to wait, there is no need to try and consistently hit a proverbial home run with all of your investments.
Long Term Gains From Short Term Pain
Many financial experts will point out the benefit of riding out market fluctuations, but doing so is much easier said than done. What if you have $25,000 invested in the stock market and your stock starts to drop like a roller coaster? You can easily see how much money you are losing and it can be next to impossible to ride it out.
The market can be a scary place, but before you pull the plug and take your money and run, or whatever is left of it, you should remember two important things. The longer you stay with your investments, the less risk there is involved. Also, even during volatile moments there are certain investments that still hold steady. If you aim for long term goals then you will find there is a lot less fear involved with investing.
Diversifying your portfolio can also help you withstand some of the impacts of a falling market.
Utilizing Asset Allocation
Asset allocation can simply be described as the process of spreading your money over a number of different categories including bonds, stocks, cash, metals, collectibles, cash, real estate, and so on. Your basic asset allocation would usually consist of investments such as mutual funds, stocks, bonds, or cash alternatives.
This type of investing is important for a number of reasons. Experts will tell you that mixing your money into a number of asset classes is one of the best ways to increase the overall value of your investment portfolio. So in reality, it is more important to decide how to divide your money than it actually is to choose which companies you want to invest in.
On top of that, by investing in different asset classes you will be able to minimize losses that are felt thanks to a varying degree of market forces. In a perfect world, when certain assets in a certain area are struggling, other assets in other areas should be flourishing. That mixture of market forces can make it a lot easier to stand pat when the market is falling.
Liquidity and Investments
Liquidity is a term that relates to how fast you can turn your investments into cash without losing your principal investment. A general rule of thumb is to avoid investments with fluctuating price movements if you are going to need the money sooner rather than later. If you know you might need the money in a few months to pay your mortgage, then you want to avoid tying it up in a long-term investment for obvious reasons.
For the same reasons, if you know that you may need to use the money you are investing within a few years then you should consider sticking to a savings account, short term bonds, or certificates. You will be given a lower rate of return but you will have peace of mind knowing that your principle investment is safe and available when you need it, without the possibility of losing the principle if you had invested in a riskier vehicle.
Investing Often and on a Consistent Basis
Dollar cost averaging is a very intriguing form of investment whereby you purchase a fixed amount of mutual funds or stocks over a certain period of time. The money you invest always remains the same, so when prices of the investment are high you will purchase less units, but when the prices are low you will purchase more units. In the end this usually means that you get a lower average share price than you would by just buying a certain number of shares at scheduled intervals.
Just as with any other investment, dollar cost averaging isn’t guaranteed so before utilizing this method consider your ability to continue to invest, even when or if the market is down.
Investing is intimidating and many people like to leave the dirty work to the professionals. However, you don’t have to have a degree in finance or work for a financial institution in order to understand how you can maximize your investments. Keep reading, inform yourself as much as possible, and be patient, and you will be rewarded financially.