Massimo Acquaviva, 2R Capital Investment Management Limited co-CEO, is an experienced business leader with a particular interest in talent acquisition, training and retention. This article will look at investing, providing an overview of some of the most important factors to consider prior to taking investment decisions.
There are many different ways an individual can start investing their funds, for example buying stocks and shares or investing in a managed investment fund. For many people, investing is an effective means of building long-term wealth.
For the beginner investor, with such a wide range of investment options available today, getting started can be a bewildering process. Nevertheless, while due diligence is crucial, an investor need not be a financial expert in order to see good returns. Nevertheless, risk comes from not knowing what you are doing, as Warren Buffet famously pointed out, so it is crucial for the uninitiated to gain a good grasp of the basics before getting started.
Developing an investment strategy is vital, helping the investor to identify not only their investment goals but also how and when they want to achieve them. Creating a solid investment plan helps to reduce the risk of emotions taking over in investment decisions. Where the investor creates a well thought out investment strategy in advance, this helps them to avoid knee-jerk reactions to a dip in the market, allowing them to focus on long-term outcomes rather than short-term market fluctuations.
Timeframe and Risk Tolerance
Investment goals and timeframe will impact the level of risk the investor is comfortable taking on. Take for example someone saving for retirement. Their age will have a huge impact on their risk tolerance, as a younger individual has more time to start over, while someone approaching retirement age will typically seek out less risky investment options, as they have a much shorter timeframe in which to save.
Investors have a multitude of options to choose from today, enabling them to select the right platform in line with their budget, goals and comfort level.
A high-yield savings account may be an appropriate option for a novice investor who is nervous about risking their funds but seeks a higher return on their money. Generally offering a much higher yield than a traditional savings account, high-yield savings accounts vary greatly from one provider to the next, so it is a good idea to shop around.
Other options include an index-linked retirement savings account, short-term certificates of deposit, money market accounts, mutual funds, index funds, exchange-traded funds, investing in stocks via digital platforms or using a robo-advisor.
Many experienced investors cite diversification as the key to their success. Diversification essentially involves spreading investments across different asset classes, markets and even countries in order to mitigate risk. With a diversified portfolio, should one investment perform poorly, the losses will typically be less as their other investments will help level it out. On the flip side, however, a diversified portfolio takes more effort to maintain, requiring the investor to keep track of various different assets across different markets.
It is vital for investors to take the time to research potential investments, weighing up factors that might have an impact on their investment so they can make informed decisions.
When considering purchasing shares in a particular company, the investor should look beyond the stock price, researching whether its goals and values align with their own.
Successful investors undertake careful due diligence, analysing the market both domestically and globally, including aspects such as interest rates, inflation, growth, unemployment rates, policy changes and political events.
Rebalancing is the process of bringing a portfolio back to the original asset allocation mix. This helps to avoid the portfolio overemphasising a particular asset category, ensuring that it remains at a comfortable level of risk overall.
An investor can rebalance their portfolio based on either a calendar or their individual investments. Shifting money away from an asset category that is performing well to one that is performing poorly may seem counterintuitive, but rebalancing effectively forces the investor to buy low and sell high. Financial experts recommend that investors rebalance their investment portfolios at regular intervals, such as every 6 or 12 months, or when the relative weight of a particular asset class decreases or increases more than a certain percentage the investor has identified in advance.
Investing can be an effective way of building long-term wealth. However, it is crucial for novice investors to make and stick to a long-term plan, understanding their investment goals, timeframe and risk tolerance, while keeping a careful watch on both their investments and the wider market to help minimise risk and set them up for success.