To achieve your long-termfinancial goals, it becomes necessary to place your money in places where itcan potentially earn more. A saving account is a good place to keep your moneybut only if you have short-term goals otherwise, if you have retirement plansor goal to send your children to college then you would need to invest.Investing can help your money to grow faster. Although it carries somepotential risks the rewards are worth to take that risk. There are manyasset-classes out in the market for investments and one investment avenue thatcan allow you to accumulate wealth faster than any other avenue is stockinvesting. However, amongst other investment avenues, it is also risky and hereinreturns are based entirely on market performance. But, if done right, it cangenerate you an income that won’t only cope with the inflation but also provideyou 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.
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What are the factors to be considered beforemaking an investment decision?
Given the recent market events,you may be wondering whether you should be making any move in the currentdownturn or not. While we can’t tell you what you should do during thisvolatile market but there are certain factors like we said before that you mustconsider before making any investment decision. Consider these areas to make aninformed decision:
Factor #1: Lay your Financial Roadmap
Whether experienced orentry-level – every investor must start from laying a financial roadmap beforemaking an investment decision. The first step in making a successful investmentis to understand your goals and objectives to ensure that you are on the righttrack. 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 outstandingcredit card bills. You need to know that the money you will put into thisinvestment 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 toevaluate your assets & liabilities priorities, overall incomes and ensurethat your next investment won’t affect your expenditures, insurances, and fundsyou kept safe for short-term emergencies.
Factor #2: Check your Risk Tolerance
Every person has differentappetite whether it is of his temperament, risk-bearing, or eating. Noteveryone is comfortable taking high risks for extras. Therefore, it isrecommendable for any investor to check for his/her risk appetite to ensurethat 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 andunderstand the degree of risk in investing in particular security you wish toplace 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, “Neverput all your eggs in a single basket.” – To ensure potential returns, it is importantto 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 tominimize the risks of bearing significant losses. For example, let’s supposeyou are invested in the stock of some XYZ company from Auto Sector whichsuddenly falls in value due to poor quarterly results or rises in crude priceswhich affected the whole auto sector, impacting the sale of XYZ Company.
In such a situation, you would incursignificant losses that would take a few more years to months to re-generate thesame returns. But, there is also the possibility that you may not receive thereturns on that investment. If that happens, all your financial planning willbe failed and you still far away from your financial goals which you werehoping to accomplish from creating corpus from that investment.
But, if you allocate youstrategize your investments to balance your risks and rewards by investing indifferent sectors or asset-classes as per your time-horizon, risk-appetite, andinvestment objectives, you can save yourself from the trouble of starting fromscratch and compensate one loss with profits from another.
Factor #4 Do not Fall for Volatility
The stock market is so volatile thatan investor can be in profit and loss, both in a single day. This type offluctuation in the market triggers investors to make decisions in haste.However, you shouldn’t have to be like those investors. If you had decided toinvest in financial security then you should trust your research and stick toit. During your investment journey, you may see many ups and downs but you don’thave to be influenced by it. Remember, the reason you made that investment decisionis to accomplish a certain goal that you would require you to stick to yourplans no matter you are in profit or loss.
All your efforts will be in vain if you panic selling or lose hope ofmaking profits with your investments!
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