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To beat the inflation and grow your wealth, you need to invest your money for better returns. Letting all of your money sitting in a bank account is simply not a wise move in the long term.
So, how do you make sure that you are investing your money the right way?
Your Risk Profile
What is your risk tolerance level?
Are you a risk taker?
Or are you a conservative investor?
To put it more simply, at which point do you think you’ll start to panic and get extremely stressed, a 20% drop or 50% drop in your investments?
Are you a single 20 something ? Or are you married with young kids? Or are you going to retire soon?
If you are young and single, you can choose to invest in more risky investments that offer higher returns.
When you are going to retire, you have to choose safer investments because you want to protect your retirement money.
If you have kids, what you can do is to choose investments with moderate risk but still gives you better returns.
Because you cannot afford to suffer a big loss in your investment. At this point in time, you probably have a mortgage to pay for. Also, you are expecting big one-time future expenses such as your children’s college tuition.
Your Investment Objective
What is your investment objective?
Are you investing your money for retirement? Or are you investing your money to pay for your children’s college tuition? Or are you investing your money to grow your net worth steadily over time?
Depending on your investment objective, your investment strategy will differ.
If you want to build your retirement fund from investing, you will need a strategy that gives you a sizable retirement fund by the time you retire.
If you want to use your investment profits to pay for your children’s college tuition, you will need a strategy that allows you to take out a lump sum by the time your children go to college.
Your Investment Holding Period
Another factor to consider is how long you can hold your investment.
Certain investments have a lock-in period.
And some investment strategy needs you to hold the investments for the long term.
So, you will have to choose investments that best suit your profile.
Do You Have An Investment Strategy?
A friend of mine, who knew very little about stock market and investing, decided that she should start investing. The very first thing she did was to open a brokerage account. Next, she started buying stocks without any strategy. Just gut feelings.
And the results?
She made a bit money at first. That made her feel very confident. So, she couldn’t wait to get into the market again.
But soon, she was holding a loss that far exceeded the small gain she got by pure luck.
Now, she is stuck with a losing position and has no idea about what to do with her investments.
Should she cut loss early?
Or should she buy more to average her cost price?
Or should she just leave it in her brokerage account and forget about it?
This is EXACTLY what happens when you have no investment strategy before you start investing in stock market.
If you have no sound investment strategy, it is better for you to stay out of the stock market.
Because it will cause you more headache and potentially huge investment loss.
What Is A Sound Investment Strategy?
A sound investment strategy will prevent you from making emotional investment decisions. Also, it helps you achieve a more consistent investment performance that meets your investment objective.
Take Value Investing as an example.
It’s a well known investment strategy that has been proven to work.
Here’s how this strategy works:
You invest in stocks that are currently priced less than their intrinsic values.
For example, if the intrinsic value for a particular stock is $30, you will buy this stock if its current price is less than $30 based on the value investing strategy.
If the stock price falls further, you will still have the conviction to hold because it’s undervalued.
Do You Have A Good Understanding About Your Investment?
Right now, cryptocurrency is a hot investment. Everybody is talking about it after the price of bitcoin has skyrocketed.
When you hear stories about average people who made millions buying bitcoins, it is possible that you will be tempted to get into the cryptocurrency market.
But, how much do you understand cryptocurrency?
What is your outlook on the market?
Why do you think the uptrend is going to continue?
The last thing you want is to put your hard earned money into investments that you have little knowledge about. When you do that, it is no different from gambling your money in a casino.
So, if you are thinking about investing your money, here’s a checklist for you:
- Your investments suit your profile
- You have a sound investment strategy
- You only invest in what you know
Let me know in the comments how you are investing your money right now.