Investing is something that is often talked about but is rarely fully understood. While it is mostly true that investing is a process of allocating resources motivated by the goal of expecting returns, there is actually a lot more to this concept rather than just putting money and expecting a gain.
In this article, we aim to rectify your limited understanding of investing by explaining its fundamental concepts. By the way, if you are interested in investing, we highly recommend investing in a certificate of deposit (CD). CDs are a low-risk type of investment, which is perfect for long-term financial goals. Check out CIT bank CD rates if you want to invest in CDs today. Without further ado, let’s start discussing the fundamental principles of investing.
Start Early, Start Young
This is perhaps the core principle of investing. Starting out early means that you are able to take advantage of the power of compound interest. Basically, most, if not all, forms of investments rely on the concept of interest. Interest is a percentage of the entire original amount that is granted and paid to the benefit of the investor as compensation for allowing the borrowing of funds and bearing the risk involved.
Moreover, interest is often compounded. For example, let’s say you invested in an investment with a 5% interest rate that is compounded per year, and your principal (the money you originally invested) is 100$. At the end of the first year, you will have already gained 105$ (100% + 5% = 105% of 100$). Come the second year of your investment period; the 5% will now be based on the 105$. Essentially, the interest you gain will be compounded with the principal amount, which will then be the new basis of the computation for the interest of the succeeding periods. Bearing this in mind, the earlier you start, the more time your money has to grow.
Diversify Your Portfolio
Diversification allows you to manage the risk attached to your investments. This involves investing in different asset types, classes, sectors, and geographies to reduce the risk of your investment portfolio. Basically, this could be summed up using the statement, “don’t put all your eggs in one basket.” In a diversified portfolio, you are better shielded against losses due to changes in value because your other investment areas are able to offset the losses with gains.
Invest for the Long Term
The market fluctuations in the short term are volatile and unpredictable. This is precisely why it’s very difficult to create a prediction or forecast of investment items over the course of a period of less than one year. Long-term investments are preferred because it allows for the emergence of trends. These trends can then serve as your basis for making better financial decisions. When investing, it’s also important to employ a mindset that is geared toward the long term. This will help you stay disciplined to avoid making rash and impulsive decisions.
Risk management is the foundation of all forms of investments. Basically, the crux of investing is how well you are able to manage and mitigate risk, all the while maximizing your gains. Risk is an inherent component of investing, but there are strategies to help you better gauge, prepare, and deal with risks. Some of these strategies include diversifying portfolios, setting stop-loss orders, and avoiding excessive leverage.
Stay Informed and Educate Yourself
Investing is not something you learn and master overnight. Instead, it’s a continual process of making mistakes and learning from such mistakes in order to avoid losses in the future. With that, it’s always important to keep yourself updated on the factors that could affect your investments. This entails having to regularly do research, hear financial advice, consult professionals, and make self-assessments.