Tips on How to Invest WiselyFebruary 3, 2022
Investing is a great possibility to achieve your financial goals. It is a proven instrument to earn money and numerous people around the world are using it. The earlier you think about investing, the better. Any amount is enough to start. However, it is much more important to clearly understand the purpose for which the money is directed.
Let’s say you have free $1,000 that you would like to invest in stocks or securities. Before you start any action, you need to make sure that you will not need this money in the next few years.
The money set aside for investment is not the kind of money that can be turned to in unforeseen circumstances. In case you lose your job or something unpredictable will happen, you need to provide a financial cushion – from three to six monthly expenses stored on a deposit in the bank.
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If there is a financial cushion, you need to decide on the investment period. For understanding: three years in the investment market is considered a fairly short period. It is better to immediately set yourself up for a period of five or more years.
What are the Options for Investment?
If you already have a financial cushion and you are sure that you want to direct money specifically for investment, then it’s time to start studying the available instruments from which the investment portfolio is formed.
Five main instruments can be distinguished:
- bank deposits,
- real estate, and
Each of them has its own level of profitability – in other words, the money that an investment instrument can bring, as well as a level of risk – the likelihood of unforeseen situations that can affect profitability.
For example, a bank deposit containing a financial cushion is characterized by low risks and low returns. The likelihood of a bank defaulting on its interest payment obligations is extremely low. At the same time, the level of profitability on deposits often covers only the current inflation.
Simply put, keeping all investments in a bank deposit is safe, but not profitable. It is more efficient to use a deposit to store only a part of investments – then this will reduce the riskiness of the entire portfolio.
Other investments – such as bonds, stocks, and real estate – can provide higher returns, but with higher risk. The investor’s task is to distribute the money among different instruments so as to obtain an optimal balance between risks, profitability, and duration of different instruments. This is called diversification.
Another great option is Forex trading. It is more about short-term deals, which are much riskier but, at the same time, can bring you a large profit. If you want to learn more about it, visit the Forextime blog that is suitable for beginners and will tell you more about CFD trading, strategies, software for trading in India, and so on.
What to Choose
The main thing is not which tool to choose. The main thing is how to distribute investments among these instruments. When compiling a portfolio, you need to look for a balance between profitability and risk – so that when a crisis occurs in one of the directions, your investments continue to grow.
There are several ways to distribute (diversify) investments. For example, by their type – stocks, deposits, bonds, gold. Or by industry: investing part of the money in stocks of companies from the IT sector, another in medicine, and the third in the oil industry. All this is necessary in order for your total investment portfolio to continue to grow in the event of a crisis in one of the directions.
And $1,000, which was discussed at the beginning of the article, can be distributed between stocks and bonds, and leave a small part for experiments. This is a common strategy as it can bring you a really good profit. At the same time, if something goes wrong, you will only lose a smaller part of your investments, which is likely to be covered by the profit from other sectors.
For example, when investing for two to three years, you can distribute the portfolio as follows: 40% – stocks of companies from the IT sector, oil and gas industry, and medicine, 55% – bonds with different levels of profitability and risk, including government bonds and securities of developing companies. Another 5% is for risky companies you like or even a cryptocurrency.
For a longer-term investment, for example, for five years, the share of riskier instruments in the portfolio can be increased: 70% of company stocks, 20% of bonds, 5% of gold, and 5% of cryptocurrency.
Overall, the more you learn, the more techniques and instruments you have. The way and strategy you will choose also depend on your character. If you are risky and courageous, it is possible that you will be interested in riskier companies that can bring you much more profit than ordinary deals.