An investor is a person or group of people who commit capital with the expectation of financial return. Investment opportunities vary widely from retirement funds, stocks, and business ventures, to mutual funds. You don’t have to be an expert in financial matters to become an investor. One of the essential aspects that go into investing is time, especially when compounding is involved.
While it’s never too late to invest, it’s advisable to start early, get your returns on time, and recoup any losses that you might incur on your initial investment. Another important aspect is determining your goals, objectives, and purpose of investing beforehand as opposed to attaching yourself to some get-rich scheme. Below are some of the essential things you need to learn about being an investor.
Risk Factors
Nearly all investments carry some degree of risk. There is no guarantee that you’ll make money from your investments, especially with asset prices always fluctuating and the market landscape changing. Before investing in securities, it is important to understand there is a chance you could lose some or all your money. You need to evaluate your risk tolerance when making investments. The worst way to start your journey is by diving into high-risk assets without a clear understanding of market volatility; even seasoned investors like Warren Buffett advocate for a balanced approach.
Understanding your need for funding is crucial, especially when you’re eyeing high-risk investments that require substantial capital upfront. The reward for taking risks is the potential for higher investment returns, especially with investments like stock and bonds, which belong to an asset class with higher risks that are better suited for long-term investments. On the other hand, cash investments are appropriate for short-term investments based on their low-risk nature.
Diversify Your Investment Portfolio
Diversification is a strategic risk management approach for your investments that entails investing across different asset groups. Different asset categories and items perform up and down at the same time in no particular manner. Divesting your assets across asset classes reduces the risk of incurring losses on all your investments. If one investment falls, there is the possibility of balancing out your losses with gains from another category.
Besides balancing out losses and gains across your portfolio, diversifying is also crucial towards achieving your financial goals, by introducing varying risks. Expanding into high-risk asset categories is meant to stimulate sufficient returns to reach your financial goal.
Emergency Fund
Drops in the market value of your investment portfolio are an expected return over an ordinary investment lifecycle. This is why you need an emergency fund to fall back on. An emergency fund is meant to cushion you in case of unforeseen circumstances that affect your investments and returns. To uphold cash flow stability, consider establishing an emergency fund in highly liquid assets that can cover at least three to six months of expenses, especially when you’re invested in high-risk assets.
An emergency fund should be available in highly liquid assets and be able to cover at least three to six months of expenses. This strategy particularly applies to when investing in high-risk investments to prevent emergency cash-flow problems.
Knowledge of Investment Markets
Investor knowledge isn’t limited to experts only. The statement also applies to investors who hire professional experts or firms to devise investment strategies for them. Starting out with low-risk investments to gain industry knowledge assists investors in choosing their investment paths and taking a more active role in their investment portfolio. For proper understanding and knowledge of various investments, do your research before venturing into unfamiliar territories, it also helps to talk to fellow investors and experts in the field.
Time Constraints
Time plays an important factor when investing, based on the investment portfolio and the rates of return you expect. The first important thing is determining whether you’d like to invest in a long-term or short-term venture. Another aspect that time plays in investing is that of consistency in adding new money to your investment.
To protect yourself from losing all your investments by adding all your money at the wrong time, you can utilize a consistent approach to adding money over a long time. By adding regular investments of the same amount, you can buy more into an investment when the prices are low and less into an investment when the price is high. The concept of appropriate timing can be witnessed in the investments of Chris Sacca and his former firm.
Chris Sacca, formerly of Lowercase Capital, is an investor who greatly benefited from making seed and early-stage investments in technology firms like Uber, Kickstarter, Instagram, and Twitter. At Twitter, he invested during the development stages of the company and, after some time, started purchasing shares with lower capital. When Twitter went public, Sacca’s affiliated funds were at 18% and valued at around $1 billion from 9% two years before. By 2015, Sacca’s initial investment had grown by 1500% and returned $5 billion to investors from his Twitter deals.
Before you start investing, take note of your current financial situation and goals. Also, evaluate how much you can afford to invest, both at the initial stages and on an ongoing basis. This is to ensure that you can afford to make the investments without being burdened by debt. Regarding your financial goals and market performance, you should also consider the amount of risk you are willing to take on investments.
