In this article, we will discuss key factors of investing. This article will make it easier for you to make intelligent investment decisions.
Everybody wants to become wealthy quickly and have a lavish lifestyle, but as we all know, Rome was not built in a day. You must have patience, practice financial discipline, and most importantly, make sensible investments if you want to become wealthy.
5 Factors of Investing
1. Have a clear financial plan
Investments made without a purpose are of no use. Therefore, the secret to your financial success is a solid financial strategy.
Your existing income, obligations and short-term and long-term goals should all be accounted for in a sound financial plan. Most significantly, your financial strategy should be on the basis of your financial objectives, risk tolerance, and capacity for bearing losses.
Only once you have a detailed financial blueprint should you move forward with your investments.
2. Start early
As emphasized by us in many previous blogs, starting investments at an early age is a considerable advantage for you because your money gets much more time to show the compounding effect.
The early investment allows you to use compounding – reinvesting your investment profit to increase your earnings.
The first is reinvestment and the second is time – both essential factors for compounding to function.
Example: Let us understand this with an example – Reshma invests Rs 10,000 at 6% in her first year of investing. Instead of taking out the Rs 600 (Rs 10,000×1.06) that she earned in year one, she reinvests it in the same instrument.
Assuming the interest rate remains the same, she earns Rs 11,236 (Rs10,600×1.06) by year two. Thus, just by staying invested, her money begins to compound, and her wealth increases yearly – this is called the Power of Compounding.
3. Diversification
Proper asset allocation is a crucial aspect of investing. No matter how appealing the profits may seem, you should never put all your eggs in one basket.
Your risk is distributed when you invest across asset classes like equity, debt, commodities, and real estate – because different asset classes carry varying levels of risk and do not necessarily move in the same direction.
4. Beware of Inflation
Your assets may lose value rather than gain if you do not invest your hard-earned cash wisely this is a result of inflation, which is the gradual increase in prices that can reduce the purchasing power of your money.
Let us observe what happens. Say A hides 50,000 rupees in a mattress for 15 years. In 15 years, the value of money would have been rupees 23,160 if the average annual inflation rate were considered 5%.
Therefore, you mustn’t let your money sit about idly; instead, choose investments that outperform or at the very least stay up with inflation.
5. Stay invested for the long term
You should always keep your long-term objectives, such as purchasing a home, funding your children’s education, getting married, and retiring, while making investments.
Avoid letting market highs and lows derail your course toward achieving the long-term objectives that you have set.
The ideal course of action for you is to make a predetermined investment plan where you decide on a predetermined amount of money to be put across various asset classes in inflation-adjusted instruments.
Investments must be made in a disciplined manner over some time without being distracted from your long-term goals.
FAQs
What are the key factors to consider before investing?
The key factors to consider before investing are your financial goals, your risk factor, the time horizon of investment, your investment amount, and your portfolio management.
What are the 5 golden rules of investing?
The 5 golden rules of investing are – knowledge of investing, keeping track of your investments, diversification, understanding the risk involved, and investing for the long term.
Does inflation impact your investments?
Yes, inflation has a huge impact on your investments. This is why choosing the right type of investment for the long-run is important. Investors are encouraged to invest in assets that can yield returns that beat inflation so that their money holds value in the long term horizon.
