To achieve your long-term financial goals, it becomes necessary to place your money in places where it can potentially earn more. A saving account is a good place to keep your money but only if you have short-term goals otherwise, if you have retirement plans or goal to send your children to college then you would need to invest. Investing can help your money to grow faster. Although it carries some potential risks the rewards are worth to take that risk. There are many asset-classes out in the market for investments and one investment avenue that can allow you to accumulate wealth faster than any other avenue is stock investing. However, amongst other investment avenues, it is also risky and herein returns are based entirely on market performance. But, if done right, it can generate you an income that won’t only cope with the inflation but also provide you with the wealth that helps you achieve your financial goals.
As we mentioned above that stock investing is quite risky especially if you are an entry-level investor, certain factors are to be considered while making an investment decision, to avoid the common pitfalls.
What are the factors to be considered before making an investment decision?
Given the recent market events, you may be wondering whether you should be making any move in the current downturn or not. While we can’t tell you what you should do during this volatile market but there are certain factors like we said before that you must consider before making any investment decision. Consider these areas to make an informed decision:
Factor #1: Lay your Financial Roadmap
Whether experienced or entry-level – every investor must start from laying a financial roadmap before making an investment decision. The first step in making a successful investment is to understand your goals and objectives to ensure that you are on the right track. You need to know whether you’re not making any mistake in investing. Maybe isn’t it the right time to invest with all the past debt and outstanding credit card bills. You need to know that the money you will put into this investment is for long-term and you won’t be able to withdraw it soon. More importantly, there is no guarantee that you will make money through your investment.
Thus, lay your financial roadmap to evaluate your assets & liabilities priorities, overall incomes and ensure that your next investment won’t affect your expenditures, insurances, and funds you kept safe for short-term emergencies.
Factor #2: Check your Risk Tolerance
Every person has different appetite whether it is of his temperament, risk-bearing, or eating. Not everyone is comfortable taking high risks for extras. Therefore, it is recommendable for any investor to check for his/her risk appetite to ensure that the investment made in stocks align with the investor’s financial goals. While you’re at it, it is important to not make buying decisions in haste and understand the degree of risk in investing in particular security you wish to place your money into.
When you make your investment within your risk tolerance, there is a higher possibility that you fulfil your financial goals. For instance, if you have a risk appetite then you can create huge corpus in investing in small-cap and mid-cap stocks with a long-term horizon. However, if you have a low risk-appetite then you can make benefit from investing in blue-chip stocks.
Factor #3 Consider Asset Allocation
Always remember, “Never put all your eggs in a single basket.” – To ensure potential returns, it is important to manage risks and avoid putting all your money in one or two company’s stock. Instead, spread your investments across multiple sectors or asset-classes to minimize the risks of bearing significant losses. For example, let’s suppose you are invested in the stock of some XYZ company from Auto Sector which suddenly falls in value due to poor quarterly results or rises in crude prices which affected the whole auto sector, impacting the sale of XYZ Company.
In such a situation, you would incur significant losses that would take a few more years to months to re-generate the same returns. But, there is also the possibility that you may not receive the returns on that investment. If that happens, all your financial planning will be failed and you still far away from your financial goals which you were hoping to accomplish from creating corpus from that investment.
But, if you allocate you strategize your investments to balance your risks and rewards by investing in different sectors or asset-classes as per your time-horizon, risk-appetite, and investment objectives, you can save yourself from the trouble of starting from scratch and compensate one loss with profits from another.
Factor #4 Do not Fall for Volatility
The stock market is so volatile that an investor can be in profit and loss, both in a single day. This type of fluctuation in the market triggers investors to make decisions in haste. However, you shouldn’t have to be like those investors. If you had decided to invest in financial security then you should trust your research and stick to it. During your investment journey, you may see many ups and downs but you don’t have to be influenced by it. Remember, the reason you made that investment decision is to accomplish a certain goal that you would require you to stick to your plans no matter you are in profit or loss.
All your efforts will be in vain if you panic selling or lose hope of making profits with your investments!