A few fundamental considerations should be made before investing your money. Making money is significantly slower than losing it on a bad investment.
Investment decisions are sometimes rushed or made with an excessive amount of reliance on the neighbor’s “sure-fire stock tip.” Follow the ten essential principles for a successful investment to avoid making similar mistakes.
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Tip #1 – Set your goals and make a plan
If you want to achieve business success, it’s important to set goals and create a plan for reaching them. By taking the time to develop a well-thought-out business plan, you’ll be able to map out a path to success and make more informed decisions along the way.
Always adjust your investments to your needs. Therefore, there is always a goal at the start of any investment career. What goals do you have for your investment? You can only choose suitable investment tools after you are aware of your objectives.
The objectives may be extremely different. Every objective justifies itself. Whether you are setting money down for a trip, an education, or your own home. Knowing where you are heading is the most crucial factor. Only those who are aware of their objectives may also accomplish them. It makes sense, doesn’t it?
Regarding your investment objectives, ask yourself the following questions:
- What am I hoping to accomplish with this investment?
- What should I put money away for?
- How many different goals do I have?
- Are my goals realistic?
Tip #2 – Set your investment horizon
Knowing how long you want to lock up your money is crucial. Your objectives are essential in this. Investment objectives and time horizons have a direct correlation. The investment horizon for retirement planning may be 30 years, but it may only be 12 months.
Your choice of investment form should be significantly influenced by the investment horizon. As a general rule, the longer you invest, the more risk you can take because you have the luxury of waiting out the majority of crises.
Age, of course, has an impact on the investing horizon. When you are retired, it is not practical to continue with a long-term investment plan for the ensuing 40 years. Depending on your goal, you can of course choose different investment horizons.
It’s also helpful to set milestones along the way. This can give you a sense of progress and help to keep you motivated.
Ask yourself the following questions:
- How much time do I want to invest in my funds?
- When should I be able to access my money?
- How long may I lose my funds?
- What percentage of my life do I still have?
Tip #3 – Become aware of your risk tolerance
Your investing choice should be heavily influenced by your risk tolerance. Long-term investing success can only be achieved if you persist and carry out your plan. The investor’s worst enemies are their fears and an excess of excitement. You will act more logically the less emotionally charged you are about it.
Recognize the level of risk you can tolerate without getting anxious. Stillness may be powerful, particularly when making investments. Your age also affects how much danger you are willing to take. Young individuals should prioritize money growth since they are more willing to take risks. On the other hand, as you grow, you should put more of an emphasis on asset preservation and more security-oriented investing.
In addition to understanding your risk tolerance, it is also important to understand the concept of business automation. This term refers to the use of technology to automate certain tasks or processes within a business. This can help improve efficiency and productivity, while also reducing costs.
Possible questions include:
- Am I a more cautious, security-oriented investor?
- Do I place a higher value on potential profits than on potential risks?
- Will I be able to survive a (partial) loss of capital?
- Can I withstand falling prices without becoming frustrated?
- How crucial are consistent results to me?
- Am I still young enough to avoid any future crises?
Tip #4 – Pay Off Expensive Debts!
It doesn’t make sense to want to pay off the building debt that has 30 years left on it right away. Given that you would likely spend the next few years merely paying off the loan, you would never begin investing in this way.
However, before investing, you should pay off other high-cost loans. These comprise, for instance, credit card debt or personal loans with interest rates that frequently exceed 12 percent annually. Additionally, it is preferable to avoid using the overdraft feature, namely the current account overdraft feature. Many banks impose a large overdraft interest rate of more than 10% in this situation as well. Therefore, before you start investing, make sure you have paid off all of your expensive creditors. You now have more freedom and spare time.
Tip No. 5 – Determine the amount of your savings
Know how much you can put toward your investment objectives before making a purchase. You must analyze your income and costs to determine how much is available for free investment each month to accomplish this.
Reduce your savings goal a little. The most crucial factor is that you can maintain it for a long period without experiencing financial hardship. Your buddy is compound interest, and long-term investing is quite profitable. By the way, even a modest beginning is valuable. You can provide for your retirement privately with just €25 each month. It is best to begin doing this as soon as possible.
Tip #6 – Build an emergency fund
You may experience financial hardship at any time as a result of unplanned expenses. Particularly when it comes to car repairs or broken appliances, family expenses can suddenly grow.
You should establish an emergency reserve so that you won’t have to sell up your investments to pay for unforeseen needs. You should if at all possible, set aside money for three to six months’ worth of living expenses. This offers you some room to be creative even if you don’t have a job.
You might choose flexible assets that are regarded as safe, like call money, to maintain the emergency reserve. Please be advised, however, that call money account interest rates are now considerably lower than inflation. Interest rates on money market accounts are typically low.
Then, although this reduces flexibility, investments in fixed-term deposits with greater interest rates are also an option. One alternative is to mix some of the deposits in a call money account and some of the deposits in a time deposit account.
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Tip #7 – Start investing as early as possible
Compound interest works in your favor the sooner you begin investing. Alternatively, dividends and income that has been reinvested if you invest in stocks, ETFs, or mutual funds. The time element considerably boosts your return even if you merely make little monthly investments. Even if they only have a tiny amount available, it almost always pays to start, especially for young individuals.
Even though you no longer feel particularly young, it’s not too late to start investing. Some retirees who only recently learned about the stock market suddenly start trading heavily. However, that is not a very wise course of action. After all, without experience, you could quickly burn through your cash and suffer large losses.
In addition to starting early, another important factor in successful investing is having strong data visualization skills. Being able to understand and analyze data is critical in making sound investment decisions. Those who can effectively visualize data will be at a significant advantage when it comes to investing.
Tip #8 – Never put all your eggs in one basket
Long-term investment success is more dependent on a balanced and needs-based investment strategy than it is on spectacular wins. As a result, never put all of your money into one investment while investing. The crucial phrase here is diversification, which refers to distributing your capital among various asset classes and market prices. Consequently, you should choose a diversified fund or invest 500 euros each in two different funds rather than consistently putting 1,000 euros in a single stock. These funds should make distinct investments, and if at all possible, they shouldn’t correlate with one another.
Diversify your portfolio across several asset types as well. So, for instance, invest in real estate, bonds, precious metals, commodities, or other investments in addition to equities. You can build a portfolio on personal needs and risk tolerance.
Tip #9 – Watch the Costs!
You can typically not escape paying fees while investing, whether you do it online or off. So, before investing, pay close attention to the fees. The cheaper service is frequently the better option. Typically, this is a direct bank or an internet discounter rather than a traditional bank. The returns on many fund offers are reduced as a result of front-end loading, transaction fees, custody fees, and performance fees, among other hidden costs. There can be significant variances between the various providers.
The largest costs are typically associated with contract termination and switchover. Because of this, one or both financial advisors are motivated to maintain your portfolio and the various investment structures active.
ETFs are a great place to start. You have an edge over traditional investment funds in that you don’t impose a front-end load or performance fee. Each year, just one management charge is billed. This is considerably less expensive than the fees charged by conventional investment funds with active fund managers, nevertheless.
Tip #10 – Be aware of taxes and inflation
Taxes and inflation are additional expenses to the management costs of the investments. Be aware that you will be required to pay a solidarity surcharge (and church tax, if applicable) in addition to a 25% capital gains tax on your profits.
Inflation must also be taken into account. Your effective rate of return has decreased by 2 % yearly on average. Therefore, be sure to confirm in advance whether your investment accounts for inflation!