Ebrima Sawaneh
If you understand the key principles of smart investment, then you will be able to manage your portfolio for better returns. However, many novice investors get bogged down with thousands of investment choices and often with conflicting perspectives on how to invest. Whether you are investing for retirement or fund children education, this article aims to helps you grasp the important principles of smart investments.
Investment Principle 1: Set Investment Goals
Before you select a specific investment product, the first step is to determine your investment needs and goals. If you have prepared one, then investment goals should be part of your personal financial plan.
Nonetheless, it is the objective of your investment. For a goal to be smart, it has to be specific, measurable, achievable, realistic and time-bound. For instance, instead of setting a goal of becoming rich, a smart goal would be to create 2 million investment portfolio at the age of 55 for retirement.
Setting an investment goal is an important activity as the expected use of the money will influence the time frame of the investment. The time frame helps in selecting the appropriate investment product. For example, suppose you’ve been accumulating investment portfolio for educational payment in next one year, you cannot risk that money in equity. You will need the funds very sooner.
Investment Principle 2: Understand the risk of the products.
The risk is inherent in all investment products, therefore, you should never make the mistake of not understanding the investments products or vehicle before buying it. When you cannot understand an investment, chances are good that it won’t be right for you. Before you invest in anything, you should try to know its track record, its true costs, and how easily it can be convertible to cash. You should also check the main risks associated with the product and then invest accordingly to your tolerance level.
Remember you have worked hard for the invested money and you have objective too.
Investment Principle 3: Avoid investments with higher management fees.
Understanding the associate fees with any investment is critical as it can drag on the investment returns. It is wiser to ask for all upfront fees, sales commission and on-going fees before making the final decision. Management fees create a real drag on investment returns and of course portfolio growth.
“Whether one is investing a lump-sum amount or a series of periodic amounts, the arithmetic of investment expenses is compelling,” Mr. Sharpe concludes in the research paper.
However, smart investors can lower their portfolio expenses and increase returns if they are vigilant in their choices of the investment manager. You should shop around and compare the fees of different investing services.
Investment Principle 4: Start early and regularly
Investing small amount on regular basis keeps your portfolio growing. Investing as early as possible will help to register asset growth. Therefore, do not think that you need lots of money to make your first investment. The longer you invested, the better you can enjoy the power compounding returns.
Financial experts also believe that it’s generally easier to save smaller amount for investment on a monthly or weekly basis than to make a large lump-sum contribution.
Investment Principle 5: Do not try to time the market
Timing the market involves the timing to buy and sell with the aim of making additional gains by buying low and selling high. This practice can negatively impact your portfolio performances if the market move against you.
It is expensive and time-consuming to try to beat the market. Whiles, it is possible for some experienced professional investor, it is difficult to consistently beat the market on a long-term basis.
Investment Principle 6: Diversification
Diversification is one of the most powerful smart investment principles that requires you to invest in different assets baskets.
It requires you to invest in different asset classes with returns that are not completely correlated. This simply means that invest in assets such that when some of your investments are down in value, it is highly likely that others will be up in value.
For example, you can invest in cash, bonds, stocks, real estate etc. You can also further diversify your investments by investing in government bonds and corporate bonds or in domestic as well as international markets. Each of these asset classes has different risks and return which can be used to meet different financial needs. Hence holding different investments in your portfolio helps reduce your overall portfolio risk.
Investment Principle 7: Pay attention to tax consequences.
There are various tax advantage investments which professional and novice investors can benefit from using them. Smart investors would assess the benefits of investing in a taxable investment compared to tax advantage before the final investment decision.
Until a tax benefit accounts are fully maximized, there are few logical reasons to start investing in taxable accounts.
Conclusion
By its very nature, it is very true that investing is a risky business. However, this doesn’t mean you have to deposits all your earnings in very low-interest earning products or be reckless with your money. There are many smart investment principles and techniques you can adapt.
