1. Always have an Investment Roadmap
Investment is a journey from when you start to when you achieve what you want. It could be a 2-year, 5-year, 10-year, or else a lifetime of a continuous journey.
The investment roadmap [1] is a simple visual guide for sketching your long-term goals and financial priorities. It is important to have a long-term investment plan that will help you maximise returns and minimise risk and the investment roadmap can help you prioritize long-term goals so that you can reach your ultimate destination.
Everyone faces daily challenges in their life and you can easily be unable to determine which is the right direction to go. That's why a financial roadmap is so important to help you make the right decisions to achieve the desired financial outcome.
2. Set the right objectives
Investment is usually a long-term objective, but it is still important to understand the objective of your investment. It could be to purchase a vehicle, buy a new house, save for your child's higher education, for retirement, etc.
Establishing the right objectives working with AGT [2] will help you better the importance of the kind of investment that will be applicable to achieve those objectives. Selecting the right investments will depend on the capital, risk level, potential annual returns, and tenure.
3. Avoid high leverage
Leverage results from the use of borrowed capital to find the investment. It is a usual practice of top investors to make sure they are able to make an annual return percentage that's higher than the annual borrowing interest percentage. Still, this is inbuilt with a risk factor as well.
For example, you can compare where you invest money that you have saved to investing borrowed money. Borrowing has a liability of repayment whereby if the investment fails to succeed, you will probably be in big trouble. That's why high leverage should be avoided by beginners.
4. Analyse your investment portfolio's risk appetite
Any kind of investment has some level of risk. The risk of an investment [3] refers to where the chance of an actual gain differs from the expected return. For instance, assume that you have invested $10,000 in the stock market and expect the share price to rise 20% within this year. But the share price unfortunately drops by -5%. The chance of differing the expected result is referred to as the risk.
Every investment has a general level of risk. For example, let's assume you have 2 investment options: investing in the stock market or investing in a bank via a certificate of deposit. Investing in the stock market is generally riskier than investing in the certificate of deposit because it has the possibility of deviating from the expected results. On the other hand, high-risk investments generally have the potential to generate the highest returns.
Risk appetite refers to the level of risk you are willing to accept in your investment. The best advice from successful investors is that you should strike a balance in your investment portfolio. It is worth exploring big opportunities in small cap stocks [4]. Your portfolio should contain low-risk, medium-risk, and high-risk investments to balance the fluctuations in your returns, on the basis of your risk appetite.
5. Have a good understanding of your cash flow
If you want to be a savvy investor, it is important to know your monthly cash flow. You might be a part-time investor that has a regular day job to cover your expenses or depend fully on your investment returns. Either way, you need to have a good idea of how much you are getting each month and what your expenses are each month.
If you understand your cash flow, you can plan your savings and retirement better. This will ensure that you have a consistent investment to maximise your returns.
6. Understand that the future is not fully certain
You don't have a 100% guarantee on what is likely to happen to your investment over the next year. The future of your investment holds at least some level of uncertainty. It is important to understand this fact well, otherwise, you will likely fall mentally if your investment fails.
7. Avoid being emotional
Emotions should be avoided especially when it comes to stock-market related investment since the investor sentiment is closely related to the share price. If a higher number of investors sell their shares in a listed company, the price of that share typically falls. On the flipside, if a higher number of investors buy shares in a listed company, the price of that share usually increases. It is the typical behavior of the stock market where the price of shares depends on investor confidence in the future of the company.
It is important to decide carefully whether to buy/sell shares based on your systematic analyses as opposed to relying on emotions and rumors. Stock prices keep changing in the short-term based on speculation, and long term based on investor confidence. Since your actions may primarily be driven by emotions, it is important to always analyse all factors carefully before you make a final investment decision.