When is the perfect time to start investing?
The sooner you start investing and make your money work for you, the greater your profitability. This is because over a period of time, not only your initial investment but also the interest on the investment keeps on growing.
Also, power of compounding, also referred to as the snowballing effect, will work to your advantage if you keep your money invested for a longer period of time.
Early Investment = Greater Profitability
Steps of Smart Investing
"Profit only greets the Prepared," is the mantra of sound financial investment. Hence, as an investor, it is of utmost importance to get your facts right about each and every aspect of investing.
Seek and gather information from multiple sources about different types of investment options available before making an actual investment.
Be well-versed in important financial terms, and know and understand what they imply.
Purpose of Investment
Every investment you make should be based on a specific financial objective that you want to achieve. You will find a wide array of investment plans and schemes that will serve your purpose.
Diversify Investment Portfolio
A sensible investor always invests in wide array of stocks, bonds, etc. to diversify risks and maximize profit.
Relationship between Risk and Return.
Every investor must understand the basic principle of investing:
Greater Risk = Greater Return / Profitability
Lower Risk = Lower Profitability
For example, bonds or putting your money in a fixed deposit account will have lower risks, and hence, lower rate of returns.
Please note that the amount of risk you are willing to take must depend on your financial goals.
Building a Portfolio
Building a diversified portfolio is a must for all kinds of investors. Getting the perfect blend of assets is essential, and it is important to spread your investments among bonds, equities, and cash.
The mix of assets in your portfolio will depend on important factors such as:
- Your financial goal
- Your approach towards investment (growth-oriented, balanced, or cautious)
- Nature of investment (short-term (1-3 years); medium- term (3-5 years); and long-term (more than 5 years).
- Your risk-appetite
Reviewing and changing the mix of assets in your portfolio over a period of time is imperative. This is because in the initial years of investment, you may opt for a growth-oriented approach and are willing to take higher risk.
However, by keeping an eye on the changing market trends and volatility, it is advisable to keep changing your asset mix to negate any adverse effects on your holdings.
You can go for high-risk bonds and equities in the initial years of investment, and over a period of time, you can encash the profits gained on your high-risk bonds, and buy low-risk bonds and equities and lock in your future profits for good.
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