Investing is the process of allocating capital to asset classes in an expectation of generating profit or income over the period of investment. Investing provides an array of asset classes that are utilised in achieving the targets.
Investments have been with us for a long time with the establishment of Amsterdam Stock Exchange in 1787, followed by the New York Stock Exchange in 1792. Over time, the market participants developed practices that broke ground through investment theories including, asset prices, investment allocation, portfolio theory and risk management.
Investments Vs Speculation
Investments are generally derived from widely used principles applied to search for an investment opportunity that is expected to deliver income or capital gains during the investment horizon.
Speculation is generally short-term in terms of the horizon, and the capital allocated in an asset to gain from change in the value of that asset is usually pre-defined or previously estimated. Upon the fulfilment of a pre-defined estimate, the capital allocated in the asset could be liquidated to realise the gain achieved by speculation.
Possible investment asset classes include blue-chip stocks, dividend stocks, or defensive stocks and it could extend to managed funds, ETFs, or debt investments. Whereas, the speculators usually look for commodities, derivatives, or cryptocurrencies.
Three Mistakes to Avoid in Investing
Avoiding an Expert’s Advice
Investing offers a lot of routes that can be taken to pursue goals through investments. There are a considerable number of people or organisations dedicated to navigating an investor through the investment lifecycle.
Investing is coupled with turbulent times and volatile markets also make the life of the investors uneasy. However, there are experts in place to navigate an investor through turbulent moments in the markets.
These experts could help the investors to pass through volatility in an effective manner. As the primary living for these people is to deliver on the expectations of investors. It is quite hectic for a working-class person to concentrate on his investments and look for possible investable opportunities.
Experts provide you with new ideas for investments, monitor your existing investments and give necessary advice to the investors for effectively navigating the markets. These experts are professionally experienced persons that are giving advice to investors.
Emotions & Patience
Investors should accept the reality that some things are not controlled by them. Acceptance of this reality would help to make decisions that would probably provide a shield to defend against the implications of uncontrollable things.
As such, we are talking about interest rates, growth rates, productivity and so forth. However, there are many things that the investors could control, and these mostly include investing behaviour.
Investors should know that investing starts with saving and beginning to allocate those resources early in the investment portfolio would only provide more time for the compounding to work for the benefit of an investor. Investing decisions are dependent on the knowledge of the investor. However, there would be no fruits to reap if there was no saving or investment. Put another way, the presence in the market is important.
Asset allocation matters a lot, and it is also dependent on the time horizon. Investment goals play an important role in achieving an asset allocation matrix. Asset allocation is also dependent on the ability of the investors to assume the risk.
Investors should not be carried away with the market moves. Markets could pull off a largest single-day gain on the back of a highly favourable development such as a corporate tax-rate cut. Whereas, markets could head south at an extreme level if the development says to increase the corporate tax-rate.
An investor should always pose patience and emotional balance to navigate their investments in the market effectively, and patience is the ultimate attribute of a long-term investor.
Investors should understand that businesses do not get revamped overnight. If the management is executing a strategy, it could take months or even years to achieve that result. However, the price movements in the market might suggest optimism very early.
Expectations & Reality
Investors should keep their expectations in check with reality, particularly for micro-cap stocks. Yes, it is true that penny stocks have the ability to deliver multi bagging returns. However, penny stocks are equable capable of incurring multi bagging losses as well.
Penny stocks are also capable of becoming a large company, and investors need to understand that the process might take five years, ten years, fifteen years or maybe the company might collapse in the pursuit of becoming a large company.
The investor should also understand the price being paid for the investment, and the expected return on those investments. It should be noted that, if you paid a higher price, you might earn a lower return. However, if you paid a lower price, you might earn a better return.
Dividend yield and price-to-earnings ratio provide the investors with the insight of how much is being paid to receive the dividend, and how expensive or cheap the stock is at the current price relative to its earnings.
An investor should consider the tax implications of the investments, and more importantly, the tax implications arising out of the trading undertaken by the investor. Price appreciation is usually taxed under the Capital Gain tax. Tax advisors could provide necessary details to effectively manage tax on investments, and the taxability of those investments.
If You Had Invested Stories
Note: Past performance is no guarantee to future
- As of 22 October 2019, (ASX: TWE) has delivered a return of +289.16% in the past five years.
- From 31 March 2015 to 22 October 2019, (ASX: A2M) has clocked a return of +2068.14%.
- In the past ten-year to 22 October 2019, (ASX: FNP) has delivered a return of +1763.41%.
- In the past five-year to 22 October 2019, (ASX: ALL) has delivered a return of +389.34%.
More importantly, the above performance only includes price appreciation. However, there could be dividends as well.