You’ve got a little extra capital, and you’d love to see it yielding higher returns than it would if you left it languishing in a bank account. You’re thinking of investing your nest egg, but you know that while gains can be substantial, so can losses. Should you go ahead and invest? Use these hot tips to get started.
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1. Know Why You’re Investing
The purpose behind your investment will guide how you invest it. If you’re just looking for a quick profit, you’re gambling. True investment is longer term and helps you to turn the power of compounding to your advantage. But there’s more to it than just that.
If, for example, you’re investing towards your retirement, you’ll probably choose a safe, balanced investment that grows steadily but isn’t exactly going to hit meteoric rises – at the same time, it’s less likely to plummet. For Canadians, the Registered Retirement Savings Plan (RRSP) is a good option. How do RRSP work? You aren’t taxed on what you put in, only on what you withdraw. That tax break is handy to have if you’ve been earning well and are looking to reduce taxes.
If you’re happy to take your chances in the hope of seeing a good profit, you might choose something that’s higher risk. More risk means more potential profit – but also more potential for loss. In general we can say safe and stable options offer lower returns but also less chance of experiencing losses. Of course, even the most stable investments sometimes surprise stock brokers with a crash and burn – but it’s way less likely and they often recover over time.
2. Don’t Get Twitchy
Investing is not for the nervous. When you see losses on what your research told you should be a good share option, you may be tempted to sell up and cut your losses. But doing so could also mean that you’re cutting your gains. If those shares recover their value and go on an upward trend, you lose that benefit. You get the loss, someone else gets the profit.
Having a short term view on investment is most often a mistake. Markets can and do overreact before swinging back into equilibrium and rebounding, and the state of the market is what determines the value of your shares. In difficult times this can mean that you need nerves of steel. Know your investments and what fund managers and stock brokers are expecting of their future performance.
3. Go for a Balanced Portfolio or Invest in a Balanced Fund
“Don’t put your eggs in one basket,” is an adage that holds true in investment. If you have substantial funds, balance your investments across a range of asset classes. You get a “swings and merry go rounds” effect, where losses in one are are absorbed by gains in another. A caveat to that might be resource investments. Of late, they have been rather volatile when compared to other asset classes like industrials, financials, or tech stocks.
If your funds are rather more limited, you can buy into market tracker funds where investment managers apportion capital according to the market share each asset class represents on major stock exchanges. Returns will therefore match overall market performance exactly. Alternatively, there are actively managed funds in which you can hope to take advantage of the fund-managers’ acumen in the hope that their fund will outperform the market as a whole.
One advantage of mainstream balanced funds is that the biggest world leaders in this field employ some of the best financial minds out there and have massive resources to investigate and track and monitor the health of every single investment. As a result, they’re fairly safe.
4. Buy Low Sell High
If you’re determined to manage your own share portfolio, expect to put quite a lot of work into investigating and tracking the performance and outlook for each element of your portfolio. If you have the right mindset, you are likely to find it interesting and quite enjoyable.
Buying at low prices and selling at high ones can turn a good profit. Again, it isn’t something you’d ordinarily do on a month-to-month basis, but rather, over a period of years. Investing money during times when the investment market is troubled may seem risky, but it’s often a good way of getting very strong investments at less than their market value.
Remember, the market usually overreacts to world events. In times of crisis, shares often become undervalued. Judging just when the market has hit rock-bottom can be a tough call and involves a combination of knowledge, experience and sheer gut feel. And if you’re planning to realize your profits when the investment hits its ceiling, you can never be absolutely sure when that will be.
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5. Beware of “Easy Money”
There are plenty of people out there who will tell you there’s easy money to be had. Ask yourself this: “If it were so easy to make money, why isn’t everyone rich?” It’s a good question, and the answer is simple: “Because there is no such thing as easy money.” So-called “Easy money” is either a scam, a gamble dressed up as investment (think binary options trading or day trading) or a high-risk investment that could fail as easily, or even more easily, than it could succeed. If you embark on an investment because someone told you you’re sure to get a huge windfall, know the risks and weigh them very carefully.
6. Any Investment has an Element of Risk
There are no “risk free” investments. As a person who has succeeded in more than doubling my capital over a period of a decade, I know that a well-structured investment portfolio can weather a lot of storms and still come out on top. But there will be times when you just have to close your eyes and hang on tight.
If you find yourself urgently needing to transform your capital into cash during one of these periods, you may just find yourself absorbing considerable losses – even leaving with less money than you arrived. If you’ve put all your faith and all your capital into a few investments, aren’t working through a fund that spreads investment risk, or haven’t looked to diversify your portfolio, the risk is even greater.
7. Stay Informed
Regardless of the vehicles you choose for your investments, it’s wise to stay informed. Although blips in the market caused by world events ranging from the election of a new world leader to coronavirus and beyond are to be expected, if we take the longer view, and look at big money trends, recovery is well underway.
What this graph doesn’t show is that certain sectors are lagging – at the moment its tech stocks that are driving recovery for the overall curve. Is that a buying signal? Not really.
You should already have bought in when the investment cost was way lower then it is now. Industrials are taking strain right now, and that’s probably a good place to invest if you’re planning to restructure your portfolio. Is this good advice? I don’t know for sure, but I think it is!