We have all at some point heard about stocks and bonds. Other than these, there are many more different ways for us to invest our hard-earned capital. And funnily enough, it is not something we are being taught at school. There is a thought circulating that investing can be broken down to an equation. If that truly is the case it would be a very complex one. Investing is a tool for us to build wealth for us and our loved ones. And the best part of all is that it is not reserved only for the already wealthy. Which means that anyone can start investing at any point in their lives. The sooner, the better of course. Some might even say that investing is just like gambling. What differentiates the two is knowledge, patience, and time. In this article, we will cover the facts surrounding the investing process, in whatever form it may come.
1. The definition of investment
In short, it is the act of committing capital to an endeavor with the expectation of obtaining additional income in the future. A form of delayed gratification, if you will. Most of us work long hours at our workplaces in a company or our own business. That means sacrifice and stress. Could our time and effort be used in a more efficient manner, by working smarter, not harder? If we take some of that hard-earned money and invest it in our future, that is a way to optimize our earnings. Investing also means prioritizing where our money goes. No one has issues spending for instant gratification. Although it does make life more interesting with vacations, exotic dinners or a new outfit, prioritizing our financial future plays a vital role here.
2. Basic terms
The list of ways for one to make an investment can seem to be endless. But before we go into it, we need to cover some basic terms. Assets are an owned resource that is expected to increase in value. Holdings are a specific asset in our investment portfolio. When we say portfolio, we are referring to the collection of all of our investments, as a group. Basically, we want to diversify our portfolio as soon as we deem such a thing possible. This means investing in a wide range of different assets, rather than just one. Finally, our asset classes are groups of assets with similar characteristics. Think stock, bonds, and cash.
3. Calculated uncertainty
No one can foresee the future. We can have insight up to a point. The further down the road we try to predict, the more the factor of uncertainty grows. Luckily, we can offset that uncertainty up to a point. There is no substitute for discipline and knowledge for negating the entropic elements when it comes to investing. Doing our absolute best by researching every aspect of the potential acquisition is our responsibility. The last thing we want to do is to rely on sheer luck. At some point or another, it will run out. Much in the same way, we can assume that others have a similar scope when viewing into the future of their investments. If one seems to make all the right moves, it just means that a lot more hard work and knowledge has been invested.
4. Stock market volatility
From 2009 onwards, we have witnessed the so-called Bull markets. These can make almost any investor a millionaire in just a few years. These markets are common but do not represent the usual state and history of the stock market. When investing, both feet need to be on the ground. There is no easy money, no fast cash. There will be corrections and bear markets. No matter how bad the environment might become, we must be prepared to not only swim in it but also to invest even further. In order to truly make it in today’s stock market environment, one must have a long-term mindset. A smart move is to invest in sectors that are most likely to weather the most severe market fluctuations.
5. Alternative forms of investment
As stated before, there are plenty of conventional ways for us to invest. The basic categories are ownership, lending, and cash. These are broad descriptors that are helping us explain different types of investments. But there is a fourth category, the alternatives. What portion of our portfolio are we to devote to this category is up to us. The general rule of thumb is not to prioritize it over the others. Good examples are commodities and precious materials. Investing in a resource that affects the economy can be a wise choice. Oil, meat, and such, are just a couple of examples. When it comes to precious materials, gold, silver, and diamonds are examples that have historically held their value through difficult times.
6. Risk to benefit ratios
Investing always has a certain risk associated with it. We need to be prepared at a point to lose all that we have invested. From another angle, we should never invest what we are not prepared to completely part with. We can influence certain factors to manipulate this ratio in our favor. One of the smartest moves one can make is to build a solid foundation on which to invest on. What this means is to get ourselves rid of any previous financial obligations we may have. Getting rid of our previous debts will bring us the strongest base from which we can propel ourselves from. We can even get a low-interest debt consolidation loan to help us in this endeavor.
The biggest consequences are not in investing, but in not investing. What we do not try, we certainly lose. A shame to pass out on creating various different passive forms of income, or our retirement plan. With the advent of the Internet and online communication it has never been easier for us to start researching the best options for investing. Like all things of value, it will take hard work, effort, planning, and time, but will be worth it at the end.
