Understand these 5 Points before Investing

Investment is when you exchange your money/asset for another form of asset with an expectation that you will get your money with some returns. Before you start investing your money into any form of asset, it is important you understand the following 5 points:

investing

1. You do not need lots of money to start investing

Many people think they need lots of money before they can invest. That is not the case and let me advise you that many investors started investing with small amount and build it over time. You can start investment as low as $30 in most countries. If you work patiently, you can do it. Example if you save $10 every month by the end of year one you will have $120. It is not the amount you saved but what percentage of your income you have saved.

2. How much do you have?

You have to calculate how much money you have at your disposal for investment. To be honest, it does not make common sense to invest into an asset that will return 8% when you have credit card balance that charge 20%. Pay the credit card or any other non-value adding debts first.

3. What is your Investment objective?

Before investing into any asset, you have to be clear about your investment objectives. Investment objectives may include growth, income, safety or combination the three. To Determine your investment objective, ask yourself the following questions :

a. What do you want to do with your money ( e.g retirement, school fees, buy house etc)?
b. When do you need the money e.g 2, 3 or 20 years’ time?
c. How much risk are you willing to take to make above-average returns?

4. Understand the investment products

You have worked too hard to earn your money, therefore try to know every aspect of the investment well before you part with your funds. Investment products have different risk and generally the higher the risk the higher the return. Remember, you have set an investment objective. For example you should not invest emergency funds into a stock or shares. Such funds go into a savings account or 91 days Treasury bill.

Common investment vehicle includes:

a. Savings account – very safe investment but low-interest
b. CD – we are not talking compact disc but certificate of deposit. You deposit the money with a bank for specific period at a specific interest rates. They are also called time deposit or fixed deposit in some countries.
c. Money market funds – pool money  for investment into products like treasury bills, CD and even savings
d. Equity/share/stocks – buying shares in companies. It can be listed or unlisted shares. Don’t invest into a company if you don’t understand how they make money.
e. Bonds – government or corporate bonds
f. Mutual funds –pool money for investment into bonds and stocks. Try to understand the fees and performance
g. Index funds – Unlike a typical mutual fund, where fund manager selects the fund holdings, index funds follow a predetermined composition of  a given index in exactly the same proportion
h. and many more products like EFT

5. Do not put all your eggs in one basket

Diversification is investing your money into different types of products.  Two key reasons why you need to diversify :

a. Invest your funds into different assets, because if one asset goes bad, you have one problem – portfolio theory.
b. You have different objectives and they will most likely have different time frames.

Finally, you are advised to remember that the past performance is not a guarantee of future performance.

What do you do before investing ? Share it with us in the comments section below.

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