Investment
Simply put, investment is the exchange of time, effort or material for the expectation of future gain in a specific time frame or period. Just like working in a company, you give up your time and put in effort to potentially get promoted and have a pay increase. You may also be starting a business and exchange for your time, effort and capital to grow it and hope for more capital growth. So is take further education to improve our academic profile in the hope of securing a better job position leading to a higher salary.
Almost everything we do in our life can be quantified as an investment in certain area. What can be done is to understand that there will always be a trade-off in certain terms in order to achieve gain in another area.
Firstly let’s understand some key ideas:
Risk profile
Not everybody is willingly to take the same amount of risk when it comes to investing. Risk is usually measured in probability; the chances of a certain event to occur and the impact of the event itself. An individual that simply wish to protect his capital at all cost will fall into the category of a Conservative investor, bearing minimum risk and minimum gain. A Moderate investor, who is willingly to undertake some degree of risk and capital fluctuation, could potentially be rewarded with higher gain to compensate for the risk taken. Likewise an Aggressive investor that has excess funds or is will to take higher risk of losing his capital should ideally be expecting higher return.
Understanding the type of investor you are helps ensures your expectation and results obtained are aligned.
Financial Objective
Know the purpose of why you are investing for the given amount of capital. Are you seeking a safety net for retirement? Looking to generate income from interest gained or dividend? Seeking high potential capital gain at the risk of losing a portion or the entire intended capital sum? These are all important reason to consider then parting with your money for an investment.
Risk to Return
There is no free lunch in this world, basically nothing comes free. Theoretically low risk equates to low return which higher risk imply higher return. This may not be always true. Take the example of an individual placing all his money in a bank saving account; while he is not generally not exposed to any major risk, the returns from interest gained may not be sufficient to make up for the rate of economical inflation. So while he took on minimal risk, the returns could end up being negative after being eroded by increasing price of living, also known as Purchasing Power. Similarly buying a lottery ticket for a shot at a couple million dollars might not be practical as the odds of winning against the prize pool is not in the ticket holder favor. Even if you purchase every single ticket, you even up making a loss as the cost is higher than the prize amount given out.
Calculate the amount of risk you are taking against the potential return would be a wise choice before parting with your money.
Asset classes
There are so much options and financial instruments available to the retail investors in the financial market, where do we even start? Stocks, RIETS, Properties, Commodities, ETFs, Unit Trust, Bonds, Cash equivalent are just some of the traditional investment instrument. Looking at them individually opens up just more option just like Blue Chips, Large Cap, Mid Cap, Small Cap or Micro Cap stocks. Within each company share, are they preferred shares or common shares?
Understanding market conditions and diversifying your money would lead to a stronger financial portfolio that can better withstand sudden market downturn and perform the best when opportunity arises.
Remember to never put all your eggs in one basket!
While all investment would involve risk to a certain degree, it does not mean that we have to spend sleeping nights worrying about our money when it comes to take our hard earn money to invest for potentially higher gain.
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