TIPS for Investing Wisely

Everyone today appreciates the need to save whether for a house, for children’s education, a wedding, or for use after retirement. All these goals can be realized through excellent financial planning. An intelligent plan entails investing your money in an appropriate combination of assets with potential to generate the income needed to achieve your goals. If you invest wisely, you can maximize the earning on your investments

There are many investment avenues available, but a wise investor does not invest on impulse, a hot tip or follow the herd.

An investor should discriminate between information, casting away irrelevant and illogical pieces of information, and checking for opportunities and facts before making an intelligent choice of investments.

Know Your Investment Profile – A wise investor chooses an investment product not only according to his goals and the amount of capital available but also according to his tolerance for risk. All investments carry a certain degree of risk. You have to determine whether you are a “risk-taker”, a “moderate” or a “risk-averse” person. Depending on the extent of risk you intend to take, you should pursue an investment strategy (aggressive, moderate or conservative) that fits your risk profile.

Aggressive investors concentrate on investments that have the potential for significant growth. They are willing to take the risk of losing some of their principal, with the expectation that they will realize greater returns.

Generally, conservative investors feel that safeguarding what they have is their top priority. These investors want to avoid risk particularly the risk of losing any principal even if that means they will have to settle for very modest returns.

Moderate investors want to increase the value of their portfolios while protecting their assets from the risk of major losses. They usually buffer the volatility of growth investments, such as stock, with a substantial portion of their portfolio allocated to produce regular income and preserve principal.

Do Your Homework Before You Invest – Don’t put in your money until you have understood all relevant information regarding the investment.

Prepare yourself for the vigorous homework of analyzing company’s annual reports, accounts and other statements while keeping abreast of what’s happening in the industry, country and elsewhere that may affect your investment. Consult your investment adviser/broker to get latest market information about shares you intend to buy or sell. Be skeptical of any thing picked up from rumors, particularly if you cannot rationally explain their choice.

Think Long Term – Bear in mind that even in the best of securities/shares, there can be short-term aberrations. It is important to have the power to hold your investments for longer periods. Studies have shown that investments properly timed and based on strong fundamentals have been very profitable for investors in the longer term.

Avoid Putting All Your Eggs in One Basket – The best way to minimize risk is to diversify your investments across various investment products. If equities are your sole investments, it makes sense to diversify between different companies and sectors. In this way, loss made on some investments can be absorbed by gains made in others, keeping the overall return on investments positive.

You can also diversify your investment by investing in open-end funds managed under various unit trust schemes. While investing in mutual funds check the rating of the instruments. Similarly while investing in any security please check the rating if any available.

Beware of promises of quick profits or sky-high returns. Remember: higher the gain on investments, higher is the risk involved. This is the fundamental risk-reward trade-off.

Things You Should Know Before You Buy a Stock: