How can you make your money grow?
Conventional advice would be, to set extra money aside for retirement, put in the bank or pick up the next hot stock or top-performing fund. So, where should you begin and how do you begin?
Here is what I like to start with: Investing means, laying out the money today with an expectation of getting more money back in the future — which, accounting for time, adjusting for risk and factoring in inflation, results in a satisfactory compound annual growth rate. Let’s see what are the key investment fundamentals
Here are our 5 key Fundamentals of Investment:
Rule # 1: Ask yourself, “Why do I want to invest?”
It could be to help your kids with their education, retire comfortably, support a charity, launch a new career, start your own business or buy a vacation home in the next decade. Identifying this and the time you have to grow your portfolio will determine how your investments should be allocated amongst different asset classes.
Rule # 2: Get comfortable with money
You have to understand the amount of money your vision will require. Research, study and learn how to make smart decisions by investing time in your financial education. Warren Buffett credits his financial acumen to his reading habit. He describes discovering “The Intelligent Investor” by Benjamin Graham as one of the luckiest moments of his life because it gave him the intellectual framework required for investing. Take advantage of several online resources such as virtual classrooms that offer video tutorials of different types of investments. Explore this white paper on behavioural finance outlining how we can use emotional discipline to create a solid long-term investment strategy. Commit to learning and you will get better at investing.
Rule # 3: What is your time horizon?
Even if a particular asset class fits in with your liquidity situation, it may not necessarily be a good fit for you. Say you have a spare $100,000, which you will need in five years and you were given the chance to invest in a business that had no projected liquidity event and did not pay dividends. It would not be wise for you to make the investment as you have a need the opportunity cannot fulfil — namely, cash back within 60 months.
Rule # 4: Understand your risk tolerance
Be honest with yourself about where you fall on that spectrum. For instance, you do not have to own stocks to build wealth. There are other asset classes that could benefit you and that have abilities to compound capital. If you can assume more risk, then it would be prudent to devote your portfolio to assets such as equities instead of low-risk assets such as bond and fixed-income securities.
Rule # 5: There is no right number of investments you should own
Are you diversifying or “di-worse-ifying”? You do not need to load up on every Next Big Investment that comes along. Before you make additions to your portfolio, understand how each investment works, what specific role it plays and how it improves your portfolio’s performance in the short and long term.
Rome wasn’t built in a day and neither is financial intelligence. So, what actions are you going to take today to build a prudent portfolio for the future?
