It doesn’t matter whether you’re investing in gold, finding your way around the property market, or dabbling with Exchange Traded Funds, there are some basic things that you need to know, before beginning to invest in anything.
Understand Your Market
There is an element of risk in every investment, some say the higher the risk, the more you stand to gain, or of course lose. If you venture into an investment without knowing what you are doing, you are increasing the risks and might as well be gambling. Successful investment takes research and planning, if you don’t understand what a company does, then why on earth would you invest in it? It sounds obvious, although you’d be surprised at how many people invest without getting to grips with a companies financials, or without researching what might effect the value of their funds.
Create Your Own Investment Principles
Making money from investments of any sort, is a complex business with so many variables that no one could understand them all. This makes accurately predicting what will happen to the price of gold, or the housing market, impossible. For this reason, many investors create their own investment principles that they apply like rules to every potential trade they make. These rules need to be tight enough to protect you from risks that you do not feel comfortable with, and wide enough to give you the scope to take a few calculated risks. For instance, Warren Buffett, one of the most successful investors of all time, is not comfortable with investing in tech companies, so he never has. I’m sure there have been many tempting tech start-ups that have come and gone over the years, however, he has stayed true to his principles, and never touched them. Putting money into the unknown, increases the risks, and there are enough other sectors to keep Buffett busy. You may decide that learning the intricacies of foreign property law, is not a good use of your time, and take the decision to never buy property abroad. Of course, the opposite may be true, and you might relish the chance to get stuck into the research. Your principles should be there to allow you to make investments that play to your strengths and protect you from your weaknesses.
Diversify
Diversification is about balancing risk. If you are starting out as an investor, you are going to want to look at the funds available and spread them out across a mix of different investments based on what you have already established you feel comfortable with. Keeping 100% of your funds in fixed interest bank products will give you the safest return, however it will also give you a low yield. Balancing a percentage of your assets in ‘safe’ investments will protect you from total disaster, should the worst happen and all your investments dive. In theory, the larger percentage you have in risky investments, the more potential you have for growth. You may want to make one of your principles to do with never investing more than a certain percentage of your assets in what you deem to be risky investment types.
Diversification is not only about balancing safe and risky, it’s also about balancing the type of investments i.e. if they have money in property, they may also want to also have some in ETFs. A venture capitalist may also want to invest in antique diamond rings. When investing in companies, you might want to chose to be diverse about the types of companies you invest in, whether that be tech vs utilities, or companies with a predictable turnover vs those with erratic income streams. Of course, your diversification also needs to be in tune with your investment principles.
So there you have it, thoroughly research every investment. Create your own rules to protect yourself from what you do not understand, and diversify to protect yourself from risk. The key to successful investing is knowing why you are making decisions. If you feel like you are making a punt on something, then you are well and truly in gambling territory.
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