Smart Ways To Invest MoneyIn smart ways to invest money we identify the factors that lead to a successful investment. We look at the importance of managing investment capital sensibly. And the need to devise our own investment system. Lets look at the principles underlying smart ways to invest money . . .What is investing?Let’s start with a common definition:“Investing is committing money to a business or venture, with the expectation of gaining a pleasing return on the invested capital.”I really like this definition, but as investors, we need something more useful for our purposes. Here is a better definition . . . You are investing when you:
Investing requires analysisInvestment is not a guessing game. It’s based on doing some homework. There are some fundamental checks we need to do to ensure that a company is financially sound before we buy into it. We also need to know how the company makes money and look at the prospects for the company going forward.For details on the analysis that’s required before lending a company your money. And to learn the specifics of smart ways to invest money, see the Stock Market Tutorial. Safety of principalTo determine whether a company would make a nice addition to our portfolio we have to consider the upside potential and downside risk. For the moment, let’s just consider the downside risk. How can you minimize your risk?If we only buy shares that have a “margin of safety” our risk of loss is substantially reduced. In a nutshell, this principle implies that the share prices of publicly listed companies rarely fall below the value of the assets in the business. It is highly theoretical concept but it is still useful. Insist on an adequate returnWe look for the investments that have the highest probability of generating a high return. We’re looking for a high “upside potential”.It doesn’t make sense to risk your capital for a low return. If you look around, you should be able to find a bank that will pay you a few percent in interest. Not only that, they will probably guarantee your capital against loss. You’re not going to build wealth with low interest. You might not even keep up with inflation. If you’re going invest seriously, you need a high return. Our analysis will give us a good measure of a company’s upside potential. If the return isn’t likely to be high – we’re not interested. Manage your capitalEffective money management is the hallmark of a successful investor. It’s a key principle when considering smart ways to invest money.Diversification is about spreading your risks across multiple investments. The idea is that if one or more investments don’t live up to your expectations then by the law of averages your other investments should even out your overall portfolio performance. Diversification is a good thing but you can overdo it. The result is a decrease in your share portfolio performance. As a general rule, the more shares you own, the more likely you are to earn average returns. There is no hard and fast rule. A portfolio of about ten shares is a good size for a conservative investor. Any more than twenty might be a bit of a stretch. You have to keep track of the companies in your portfolio and it could be a challenge to manage a large number of them. Your investment capital isn’t your life savings. We only invest money that has been put aside for the sole purpose of buying investments. Diversification applies not only to our share portfolio, but also to cash that we have put aside for other purposes. It’s a good idea to keep some cash available at all times. If there is a stock market correction (i.e. a point in time where the stock market decreases in value by a substantial amount) you will be poised to take advantage of it. You might be able to buy some great stocks at bargain basement prices. Or, if the prospects for a company you already have shares in increases sufficiently, you might consider adding to that position (a position represents a stock in your portfolio). For more information on managing capital, and smart ways to invest money, see Portfolio Management in the Stock Market Tutorial. Start small and buildIf you’re new to investing, start small and build up gradually. As your investment skills grow you will be more confident when investing larger sums of money. The great thing about the stock market is that you can start with a small cash outlay and build up your portfolio as you go.Topping up your investment capital with some savings from time to time is one way to build your portfolio. You could create a separate savings account specifically for your investment capital. This keeps your life savings separate and makes it easier to keep track of your money. It is important that you save your own investment capital. Don’t borrow money to invest. This is a very risky proposition for a sophisticated investor, let alone a beginning investor. Consider reinvesting your returns. Your returns come from dividends and the profits you get when you sell shares. The benefits you get from reinvesting your returns are similar to the compounding interest effect. The reinvested returns help you to build wealth more quickly. Follow your own RulesIf you do enough research, you’ll find that successful investors follow a set of guidelines or a system.It’s important that you develop your own style. Set up some guidelines to ensure that you only invest money in good companies that are selling at cheap prices. And that you sell shares when the time is right. The investment system doesn’t have to be set in concrete but it should give you some parameters to work within. This puts some quality control around the investment process. The system could be as simple as a checklist or a spreadsheet.
The Beginners Guide To Investing - lessons: Lesson 1: Smart ways to invest money Lesson 2: Historical stock market returns Lesson 3: Understanding the stock market Lesson 4: What causes stock price movements? Return from Smart Ways To Invest Money to The Beginners Guide To Investing Return from Smart Ways To Invest Money to Home page |