Investing is a key part of our personal finance journeys. We all aspire to invest in one or another whether our goals are security, comfort or the absolute freedom that wealth provides. Investing looks simple from the outside, take a few thousand dollars, put them in one thing and after a while that investment is worth a few hundred thousand. Unfortunately, it is not that simple and finding success using that, for the lack of a better word, strategy is extremely difficult if at all possible. To succeed at investing there are foundations that we need to have a grasp of.
First and foremost investing has risk associated with it. All investments have some sort of risk. What we need to understand about risk when considering an investment is not just the risk embedded in the investment but also our own risk profiles concerning the money we are investing in. For example, short term investment money is usually money that people would not like to be placed in an investment that bears a high risk. The longer your investment horizon the more open you will be to risk. So prospective investments must be assessed compared to the investors’ risk appetite.
Understanding a prospective investment is a guiding principle of investing. The common thinking is that we should only invest in things we understand and I believe this is true for all investors. It is important to understand factors such as the risks, the markets and other factors that affect the performance of the investment over time. Research is in fact what makes the difference between a gamble and an investment.
The most powerful force in investing is time. Millionaire investor stories have the common thread of time; the longer you are in investment the more time you have to benefit from its performance. Bitcoin as an example was worth US$1 in 2011 and now 10 years later it has scaled US$60000. Time is an incredible force when you put it on your side in investing. The sooner you get in the sooner you can take advantage of time.
Despite what gurus and other investing evangelists will have you believe the amount of capital invested is key. All other things being equal the gains of a person who invests $1500 will always outweigh the gains of a person who invests $100. This cannot be ignored. So even for those who have small amounts to invest at a time, continually investing and increasing your capital invested will empower you more in the long run. Many investment success stories are in fact the result of continuous small investments than one big investment.
Another important foundational pillar of investing is focus or concentration. I will use the example of investing in the Zimbabwean Stock Exchange. I employ the principle the focus by narrowing down the number of companies I look at. Trying to become a master at understanding 50 companies (and in comparison to other exchanges that is small) is a fool’s errand so I limit my in-depth understanding to 15 companies. 10 of these are permanent long term focus companies and the 5 change from time to time. The point is focus allows me the time to research and understand my investments. If you are invested across many investments which require a lot of your time in research =you may be spreading yourself too thin.
With these five concepts understood you can consider yourself ready to invest. It doesn’t matter whether you choose to invest in the money market, small businesses, shares or other investment product, these principles apply all across the board.