Incomes grow, while you sip a cocktail on a beach or lay on a sofa watching a new season of your favorite series. Just a dream? No, it's perfectly possible. But in order to do that, you will first need to think carefully (or contact someone who will do this for you) and invest properly. We will tell you what to know about investing before you dive right into the exciting world of finance.
What is investing?
Investing is the allocation of funds with the purpose of obtaining passive income. Put simply, you invest and your funds grow without any extra effort from your side. You don’t work but still earn money. Everyone can become an investor. Everything you will need is the desire and idle cash on hand. Small quantities will work, too.
It is wise to remember that every investment should be assigned with the term and objectives of its own. The choice of the optimal set of assets will be based on these factors. Short-term investment with a high degree of risk is in no way similar to long-term and risk-free ones.
Myths about investing
- Only millionaires can invest. OK, and billionaires, too. As we said, you can start investing with any amount of money. But still it is important to understand: your profit is a percentage of the invested amount. The more you invest, the bigger is the potential earning. Each investment should have a predetermined goal and a set period time. And it is better to determine them in advance in order to avoid a situation when you expect a million dollar returns after investing $500 just one month ago. Things like this simply do not happen. A realistic forecast is a yield of about 20–40% per annum. Yes, exceptions do exist, but the majority of companies offering to double your investment in a fortnight are most probably scammers.
- Only professionals can invest. There are professional investors, and you can always seek their advice. But logical thinking, discretion and exposure to major economic news can provide you with a great headstart in your personal investing career.
- Investing is a huge risk. When investing, a risk is always involved. But all the financial operations in your life involve a certain degree of risk. Keeping money in the bank, opening your own business or even a new employment — all of the above can potentially damage your financial wellbeing. Investing can no doubt lead to different results. However, if you treat your investments correctly, this risk is significantly reduced.
Types of investments
All investments can be divided into three major types:
- Real. These include the purchase of property, existing production facilities, and trademarks.
- Financial. Most people associate investment in general with this particular type. Financial investments include the purchase of securities (shares, bonds etc.), as well as the acquisition of foreign currency, the exchange rate of which is expected to grow over time.
- Speculative. The purpose of such kind of investment is to earn on short-term fluctuations of the asset price. «Short-term» is the key word here. Shares, currencies and precious metals can all become the underlying asset.
The return on investment is directly linked to its riskiness. Why are the investments in cryptocurrencies so profitable? Because the risk of losing the entirety of invested funds is extremely high. Shares of big international companies rarely grow more than 30% per annum (usually even less). But at the same time the risk of losing all the money invested in them is close to zero. There are four types of investment distinguished by the degree of risk: risk-free, low-risk, medium-risk and high-risk.
Investments can also be classified according to their urgency. Short-term investments are carried out in the period of up to 1 year, medium-term — from 1 to 3 years. Investments for more than 3 years are already considered a long-term investment. Each investor determines the term for which he wants to invest money personally.
What to invest in
As we see, cryptocurrencies are not for everyone. But there are other interesting options:
- Property. Real estate investors apply different strategies. Sometimes it is enough to have a downpayment for one apartment that will, thanks to the rent, turn into several apartments in a matter of a few years. And that’s without any additional expenses.
- Securities. For example, bills of exchange, shares, and bonds. In this case, however, it is advised to seek professional advice. Securities can be tricky. Their profitability is not always obvious to rookie investors.
- Bank deposits. The riskiness of this type of investment is very low. Your main task here is to choose a reliable bank. But before turning a profit, the money will have to spend at least several months in the bank account.
- Precious metals. This type of investment has existed since the immemorial times. Gold, platinum, silver and palladium — all deserve your attention. And we are not only talking about buying jewelry and ingots. You can open a «gold» deposit in a bank or buy shares of a gold-mining company.
- Promising startups. No, if your friend has decided it is time to sew cat costumes and offers you to become an investor, don’t rush it. Startups are risky, you need professional experience and entrepreneurial flair to be successful with them. Selecting the right project is not an easy task. But, properly invested, the money can turn you into a founder of another Apple.
- Mutual investment funds. In this case, you give your money to professionals who invest them and get a percent of your profit as remuneration. In this case, the chance to get a good income is especially high. And the risks are not so serious.
The best way to invest
In order not to be fully disappointed in investing, it is worth remembering these rules:
- Invest idle cash you can afford to lose. And no, money for products, rent and essential family needs is not idle cash.
Robert J. Allen: «Your goal, as a creative investor, is to launch your ship into financial orbit ... and then put it on automatic pilot»
- If you can find idle cash, do not invest it all in one asset. Better turn to the following scheme of funds distribution (which is, by the way, is used by many professional investors): allocate 10% to high-risk assets, 30% to mid-risk, and 60% to low-risk ones.
- Learn as much as possible about the instruments you want to invest in. And continue to study them even after the investment is made. Remember that an investment is not a slot machine, as its income should be planned in advance.
- If you don’t understand something during your study, don’t be afraid to consult the professionals. Or contact them right away.
- Keep your eyes open. For example, interest rates in the bank you use can suddenly grow. This event should not be missed.
- Don’t be impulsive. In this matter, emotions are not the way to go. Logic, discretion and cold-minded approach to everything are your best friends as long as you want to invest successfully.
Investing is exciting. But it is also important for investing to be profitable. And if you are not sure that traditional investments can provide you with the thirteenth salary (at least), consider investing in yourself. In your training, health, and leisure. The risk of such investments is zero, but the effect of them can be higher than any expectations.