Everyone is interested in making more money. Even the least savvy among us have heard of “investing” but may not know what it entails exactly or think that it’s just for the “big boys” (with big bucks).
Well, we’re here to disabuse you of that. You don’t need to be a billionaire or even a millionaire to start investing, but you do need to understand how it all works.
Here’s the first important rule of the investment game: understanding risk vs. return.
Investment is like dating
When you’re playing the dating game – be it on Tinder or the traditional meet-new-people-anywhere method, there’s a certain amount of risk involved, right?
Most people date with the intention of making it big somehow in the love department – like finding a soul-mate, true love or just a really good… date. Fact is, no one wants to lose out, have a bad time or find out that your date is a jerk.
But how do you know who to pick and whether your choice is the right one? Even when you start dating for a while, you may find out certain attributes that you don’t really like about the person.
Here’s the thing: you can’t know for sure! There is always a certain amount of risk involved in dating. Similarly, when you invest, there will be risk – no matter how good your unit trust, financial adviser representative, broker or even the economy.
Like dates, each fund you put your money into behaves differently and offers a different risk/return profile.
So Mary could be really pretty and smart but perhaps she can be a little obnoxious at times. Or Jack is generally a total sweetheart but has very bad dress sense and tells lame jokes. The point is, you can’t know for sure if you’re going to be really happy with them in the long run.
Investing means putting your money on something which can’t totally guarantee to turn a profit. Just as how in dating, you’re banking on your emotions and risking getting hurt, rejected, cheated on and other not-so profitable circumstances in the process.
Managing risk in relationships and revenue
Does losing in love and money sound like a major bummer? Well, cheer up. There’s such a thing called due diligence.
Part of being a good investor means doing your research and finding out more about the investment plan you’re buying and how it can pay out. This means sussing out what funds you’re buying and the reputation of the companies you’re buying shares of.
You also need to know your risk appetite; whether you’re willing to lose in the short term for long term gains, or if you’re really rigid about preserving your capital no matter what.
It’s the same when you date someone – you wouldn’t go out with just about anyone, right? You’d Google them first, stalk them on Facebook or ask acquaintances what they’re like to have a general picture of what makes that person an ideal candidate! This is what we’d call the triple D or “Dating Due Diligence”.
And just like how your financial adviser representative would do a financial risk assessment to gauge how risk-averse you are in order to recommend the right products, chances are, you’d also do a dating risk assessment – with close friends! They’re the best people to point out your dating blind spots, observe patterns in your dating behavior and whatnot.
So, talk to your friends and listen to what they have to say about your dating profile – use what you can.
And talk to your financial adviser representative (get one here if you don’t already have one) in order to find out what kind of investment plans or unit trusts would suit your risk/return profile.
Profit: give some to get some
The last thing you’d need to accept and understand about investment is the risk to return ratio or simply put, how the element of risk can correspond to the returns on your investment.
Some investors are willing to park their money for a certain time horizon – this refers to the total length of time they will hold on to a security, portfolio or even a stock. They would ride out the ups and downs of the economy without selling too quickly.
It’s like how, in dating, you stick to someone through thick or thin because you see tremendous potential for happiness in the relationship.
Some people are serial daters and engage in risky dating behavior. They may be quick to fall in love and even quicker to give up on people who “perform poorly” in the relationship. Or perhaps they date a few people at the same time in the hopes of hedging their bets.
These people often lose out on substantial returns on their emotional investment; either because they invest too little or because they spread themselves too thin – we don’t mean diversification, diversification is good to spread out your risks. Rather, we mean having an unbalanced portfolio, with too much of the same type of stocks.
The question you need to ask yourself is, “Can I accept losing X amount?” when you embark on your investment journey – and then decide on what that threshold amount is. In dating, you’d definitely have a couple of deal-breakers too.
The aim of the game
To sum up, the strategy for investing – especially for beginners – is really to know yourself and what you want. It may not be an easy thing and can constantly be a work in progress, which is why reviewing your portfolio (both in dating and finance) is always a good thing.
When it comes to love and money, don’t get stuck on the immediate results. Anything worth having is worth spending a bit of time and effort on.
Do you have any tips for beginner investors? Share them in the comments below!
The post Can you put a date on when risk becomes return? appeared first on Money Banter.