How to Invest Money and Grow it Fast
Published on May 15th, 2015 | by Joan Makai
Almost every financial professional would advise people to invest cautiously in the stock market. But none would deny that equity markets offer better protection against inflation than traditional instruments such as bonds and fixed deposits. But crunching numbers is not everybody’s cup of tea. That does not mean only those who understand the numbers will be rich someday and others will be left behind.
- Have a clear idea of how much can be invested and spared each month
About 1/3rd of the monthly income is a good amount to start with. This amount is further split into three parts. One part is for safe investments such as bank deposits and gold. These do not offer many returns, or may provide return temporarily. But these are necessary for liquidity. The second part is for savings that will be withdrawn for any significant expenses such as down payment of home or home loan installments. The last 1/3rd of 1/3rd has to move into stock markets. For starters, this amount may be invested in mutual funds. But any such investment has to be regularly done and increased periodically based on the increase in monthly income. The longer the amounts remain invested the more are the returns on it because of the compounding effect.
- If investing in Stock Markets, be prepared for tug of war between bulls and bears
Ups and downs are part of stock markets. Investors panic when markets dip and book their losses instead of waiting patiently for the tide to turn in their favor. If the investors were to invest more during the bear phase, they would bring down the cost of acquisition of the stock. Effectively, when bull phase resumes, their profits would be more. It is necessary to view the tug of war between the bulls and the bears as something that will happen till eternity. Therefore, after every dark night, there will be the bright sun, and after every bright sun, there will be a dark night. Knowing when to do what is important.
- Listen to others advice, but don’t follow them blindly
This happens in every bull phase. There are plenty of hopeful investors who expect their investments to scale the next height. They voice such hopes with conviction, and investors who do not do their homework, or are too lazy to do their homework become victims. These investors buy those stocks at their highest values and fail to liquidate them in time. It is necessary to study the movement in terms of percentages and across particular period before investing.
- Have a clear cut idea about the desired rate of return
It is wrong to be wedded to any stock because the market will periodically present better opportunities. Therefore, it is necessary to study a stock’s past performance and compare it with stock’s current performance. If there is a sudden spike, may be holding on for a year or two to see if the returns continue at the elevated level will be worthwhile. Otherwise, it might be better to look for other opportunities that fetch the desired rate of return. Such monitoring and pruning and plow back of profits improve the overall health of the portfolio.
- Diversification reduces risk
The traditional wisdom of not putting all eggs in one basket holds good here too. While taking risk is necessary, dividing the risk across different stocks or mutual fund units and investing at various times through methods such as systematic investment plans, can reduce risks. Such diversification of portfolio may not offer the best returns, but it will most certainly not reduce an investor into bankruptcy
Investing regularly over an extended period gives the compounding advantage, which can be substantial. Therefore for any growth in funds, a person needs to start investing at the earliest. Periodical review of the portfolio and simultaneous study of available opportunities can fetch much higher returns than conventional savings and retirement instruments.