If at the moment you have extra money to use for investment purposes, try not to be in a hurry. Avoid placing funds in some investment scheme that promises big returns with very little risks. More often than not, those types of investment offerings are not built on solid foundations, since “get-rich-quick” schemes have only one purpose, to collect as much money as they can from easy to convince and overly eager investors .
One of the most common misconceptions about investing on shares of stocks and marketable securities, is that it is all about making money by simply putting faith on the recommendations of a financial expert. You also have to think like a business owner who needs to protect a business investment by adhering to fundamental strategies and guidelines.
The Need for Guidelines or Strategies When Venturing into Investment Schemes
Successful investors do not just follow popular opinions, or get swayed by current buying and selling frenzies. They first filter out all the noise, rationalize and then make decisions by working within the framework of their investment methods and fundamental guidelines.
Others call such framework as investment strategies, but actually, most of them are principles or basic foundations of the investment system. They then serve as guidelines on how to manage the ins and outs in investing.
Fundamentals of Sound Investing Practices
Always think of risks when investing, and avoid being reckless, regardless of how much you plan to invest. Consider the following fundamentals of sound investment practices:
Evaluating the Strength of the Company
Always evaluate the company not only by reading the highlights of its financial reports. Dig deeper by looking into who is running the company, and for how long and how well it has withstood the challenges posed by economic conditions. Research about changes in leadership and take note of any improvement or failures that transpired during each tenure.
Make comparisons against price shares and earnings of its competitors as a way of gauging performance, as an investment prospect and as an ongoing business.
Evaluate Your Risk Tolerance
This matter all depends on your need for liquidity and also on your personality. Financial advisers call it investment horizons. It practically means determining the length of time you intend to park your money in an investment product, while considering your future financial needs. Consider funds you need for emergency purposes, or have to set aside for future expenses like money for a child’s college education or for your retirement.
If those factors have to be taken into account, then you have a low risk tolerance. More so if you are the type of investor who easily reacts to volatile conditions that you think will adversely impact your investment.
Keep Investments at Par with Your Level of Competence
Although it is wise to diversify, that aspect does not include extending your investments on businesses of which you have very little understanding. This guideline is important because a limited understanding of the business, also means limited knowledge of the factors and conditions that can influence your investment, either positively or adversely.
Although you cannot control the securities market, you can at least control the risks you face by knowing how to evaluate your choice of investments.
Maintain a Long Term Perspective
Short term goals are great as it gives you assurance of getting returns on your investment in the quickest time possible.
However, do not forget that there are also benefits to long term goals especially if you have already raised your finances to a comfortable level. Every return on investment earned, garners a corresponding tax payment. The tax rate bracket on short term income is higher than the tax rate bracket on long term investments.
Moreover, there is such as thing as compounded interest. This element works to your advantage, because as your invested money grows through addition of interests, the greater the equivalent earnings you will receive in due time.