Beginners Guide to Investing
11 May 09It is never late to start investing; the earlier you start, the better your money will grow. No matter how much money you have, start investing. Whenever you have surplus money, you can keep on increasing your investment amount. When you get a dividend from your investment, you can reinvest, instead of withdrawing. Therefore you will be able to compound your gains from the investment.
The best suitable investment is based on three factors - liquidity, risk and return. Liquidity is defined in terms of accessibility of your money; whether your investment can be converted into cash or not, in case of financial emergencies. An investment should be chosen based on how much risk you want to take. The most interesting factor is the returns or the income that you will be getting on your investment. The returns more or less depend on the risks associated. For example, investments like fixed deposits are less risky, though they generate less returns. On the other hand, investing in shares is risky, but it gives higher rates of return.
If you are investing in the share market, you may need to be patient before you make a profitable investment. If you invested before the market dropped, it is advisable not to sell. In fact, it is most likely time to buy shares at a cheaper price. Over time, the price of shares will increase.
Have you ever heard the rule of 72? You divide the number of years you think the market will take to recover into 72 to calculate the compound growth rate required to double your original investment. For example, if you think it will take 3 years for the share market to recover to its previous high, the rate of return is 24% (72/3) (with a dividend yield of 2.5%pa). If you think it will take 5 years, the rate of return is 14.4%. In comparison, if you invested your money in the bank, you may only get a return of 5% in the same period.
It is always important to get good advice about your investments. A financial planner can talk to you about your investment goals and gain an understanding of what risk you are willing to take. They can then recommend the right investments for you.
Whether you are a novice investor or an experienced investor, you can always follow the three golden rules of investment to get maximum returns; invest early, invest regularly and invest on long-term investment plans.
