It is impossible to perfectly-predict what will unfold in the future, and therefore there is no such thing as a guarantee of successful investment. However, bearing in mind a few general rules for investment could help an investor to minimise risk whilst increasing their chances of substantial gains.
Firstly, an investor must have outlined some defined investment objectives and have developed a realistic plan of how to achieve them. This means working to a time-scale and investment budget whilst simultaneously prioritising competing objectives, therefore allowing sufficient time and short-term loss before safely compounding one’s assets. Moreover, a correctly balanced portfolio helps increase the chances of a successful investment, as by sharing assets across several investments one is minimising the risk of losing everything due to one particular trend/issue. The different types of investments that are utilised by an investor should be tailored to their specific situation, though stocks, bond, property and cash options should all be considered.
When investing, unnecessary risks often result in dire consequences, this in turn suggesting that adequately diversified stocks are a must for the investor looking to make a lucrative return. Recent studies have suggested that up to 50 individual stocks can be required for the necessary level of stock diversification to be achieved, although diversification of funds and the way that they are managed and applied can also be crucial to the investor in securing gains.
The time scale to which one is planning to reap the rewards of their investment can also help to dictate how they go about their business, as it is generally accepted that if one is looking to invest for less than a five year period then stock options should not be considered as it is a very real possibility they will have lose money on their investment by having to sell their stocks in the middle of a financial slump. In this case, an option such as short-term bond funds should be considered. Past experience and case studies shows that stocks tend to yield the greatest results over substantial lengths of time but over a one-year period there is a 31% chance of a loss.
It may sound like an obvious point to make, but selecting the correct investment option for an individual’s particular situation is vital to the success of the investment. Fund selection must be a reflection of one’s general investment objectives and appetite for risk; carefully and intelligently analyse the choices that are available, don’t fall in to the trap of following others’ investment options and doing what is regarded as ‘fashionable’ and, if in doubt, err on the side of caution.
It is important for one to allocate the relevant amount of time to managing their investment portfolio and evaluating the success of their investments so far in relation to the objectives they set themselves before the investment. Discipline and patience are the virtues of successful portfolio managers, as well as a set of ‘rules’ that allow for consistent decision making regarding buying, switching and selling. Short-term, random movements within the market one has invested in should be recognised but not a catalyst for panicked reflex responses, as it is often the long-term trends that will carry the most impact. It is important to learn from the mistakes you may make; it is only natural to be wrong some of the time, but making the same mistake several times can have catastrophic results.
Throughout the history of investment, people who buy when others are selling (and vice versa) have made absolute fortunes as a result of their brave decision-making and exploitation of investor psychology. Remaining cool and calm in the face of frenzied market environments can be yield positive results in terms of investment gains, and once again bearing the time-scale to which you are working will help one to stick to their investment strategy in order to achieve their investment objectives and reap the rewards they were looking for.
Understanding the long-term impacts of taxes and inflation can also help one to achieve the results they are looking for from their investments, as the combination of taxation and inflation are often considered to be the “enemy” of the investor. It can be easy to ignore the effects of these factors as they are not as dramatic as, say, a massive trough in the market; however, a dip in the market will eventually lead to a boom whereas money lost to taxes and inflation is lost from the investment forever. Unless the returns from an investment sufficiently cover the negating effect of taxes and inflation an investor’s portfolio will have its purchasing power constantly degraded. Those investors who have not made particularly market-savvy decisions tend to place their assets in such places such as savings accounts, Treasury Bills or certificates of deposit in an attempt to avoid all risk, when in reality all they are achieving is the decline of their purchasing power.
Finally, the ability to compound should be a skillset ascertained by successful investors, as investing small amounts of money regularly can allow one to ‘top-up’ their investments and cover the small losses that can be a result of short-term fluctuations in the market. If there is actually a sure-fire way to guarantee a successful investment venture then the power to compound to investments is it, whilst paying into a tax deferred vehicle such as an IRA gives one the option of withdrawing a substantial amount of money in latter life to either invest further or treat as individually as a gain from investment.
In conclusion, although there are no guarantees to success via investment, the aforementioned “rules of investment” can greatly influence one’s ability to make their desired ROI and plan for further investments. Moreover, the points covered are only scratching the surface of the complex and dynamic nature of investment, and the more time and experience that is gathered through investing in various markets helps an investor develop and hone their instincts to the point that they can spot trends before they have been established by others, this giving them a competitive advantage. Services like AXA Self Investor (www.axaselfinvestor.co.uk/) are online investment facilities suitable for customers who can make independent investment decisions.