Investing can be a high-risk game. This means that you need to at least have a basic foundation of information before you start, whether you're a beginner or working with a professional financial consultant. In doing so, you're able to minimize your risk by avoiding the following mistakes:
Asset allocation is understanding the right balance between the asset classes in your portfolio given investment objectives, risk tolerance and time horizon. These asset classes include stocks, bonds, precious metals, real estate, commodities, cash and so on. You need to include multiple and varying types of investments in your portfolio because various asset classes go up and down at different times and rates. A diversified portfolio mitigates these ups and downs by smoothing out the volatility in a portfolio. If some investments are losing value at a particular period, others will be increasing in value at the same time. Ultimately, the gainers offset the losers, which may minimize the impact of overall losses in your portfolio from any single investment.
There are many get-rich quick schemes that are seldom what they allege to be. At times, you'll get a junk email or a telemarketing phone call offering investment advice. Do not accept it. Do your due diligence first or consultant your financial advisor. Caution is advised because the leads could only be trying to drive up the prices of certain stocks in order to turn a profit. Investing here could lead to you incurring huge losses.
It is important to consider that your risk profile is really comprised of two aspects: your risk attitude and risk capacity. Risk attitude is the true measure of your personal comfort with risk. Are you willing to risk a less favourable outcome whilst attempting to achieve a more favourable one? (risk versus return)
Risk capacity refers to the ability to sustain a less favourable outcome without jeopardizing your original objectives. It is affected by factors such as time horizon- allowing you time to recover from an adverse return, and total wealth – allowing you to go through a decline in account value and still maintain your desired spending.
Understanding this helps you to determine what the appropriate investment policy should be, using risk attitude as a constraint. Pulling out of an investment or blindly investing in one out of impulse or influence from others could lead to loss.
Usually, stock should be purchased as its price is getting higher. Purchasing late will lead to loss of money since the price of the stock will or might already be plummeting. Always be in the know about stock rates, go over your portfolio and consult before purchasing.
The first step in investing is to make the decision to start. The advantage of compounding is that when you reinvest any dividends or other investment returns, you begin to earn returns on your past returns. This helps grow your portfolio much faster. The lack of experience, age and lack of knowledge should not be an excuse not to start. With the help of a financial advisor and a little self-education is all you need.
Investments subjects should not be underestimated. If you are able to avoid the above mentioned mistakes, you can begin your investments journey with a little more confidence.
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