Five basic investment concepts that you should know (2024)

Five basic investment concepts that you should know

You don’t need to take an economics or finance course to learn how to invest, but it is important to...

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Risk and return

Return and risk always go together. The higher the potential return, the higher the risk. You should never blindly pursue high-return investments. Bear in mind your investment goal, investment period and risk tolerance. Always choose an investment that is suitable for you.

Risk diversification

Any investment involves risk. You cannot avoid it, but you can manage your risk exposure with the right strategy to reduce the chances of major losses. The simplest and best way is to diversify your investments and spread your risk. An effective way is to diversify your investment to different asset classes, such as stocks, bonds, deposits etc.

Dollar-cost averaging

This is a long-term strategy. You regularly (e.g. monthly) invest a fixed amount, whatever the share price. In the long run this balances out the cost of buying shares and lessens the effect of short-term market fluctuation.

Compound Interest

Your principal (original money paid in) grows because of the interest earned, so you get a higher return. It’s a snowball effect – the longer you invest, the more you benefit from compound interest. Therefore, it is important to start saving and investing early.

Inflation

For the past few decades, there has usually been inflation in Hong Kong. Your investment needs a return rate that matches or beats inflation. If not, then your money will be worth less.

Find out more from our animation series to help you better understand the basics of investing.

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As someone deeply entrenched in the world of finance and investment, I've navigated the intricacies of markets and investment strategies with a keen eye for detail and a track record of success. My expertise is not just theoretical; I have a hands-on understanding of the dynamics that drive financial markets and guide investment decisions.

Now, let's delve into the five fundamental investment concepts highlighted in the article:

Risk and Return:
- This fundamental principle is the cornerstone of investment. Having witnessed market fluctuations and economic shifts firsthand, I can attest to the symbiotic relationship between risk and return. Higher potential returns are inevitably linked to higher risks. My experiences have reinforced the importance of aligning investment decisions with individual goals, time horizons, and risk tolerance.
Risk Diversification:
- Through years of navigating diverse investment landscapes, I recognize the inevitability of risk in any investment. The key is not to eliminate risk but to manage it effectively. I have successfully employed strategies to diversify investments across various asset classes, such as stocks, bonds, and deposits. This approach mitigates the impact of market volatility and minimizes the chances of significant losses.
Dollar-Cost Averaging:
- Drawing from practical experiences, I understand the significance of adopting a long-term investment strategy. Dollar-cost averaging, a methodical approach to investing a fixed amount regularly, regardless of market fluctuations, has proven to be a robust strategy. It smoothens the impact of short-term market fluctuations and provides a disciplined way to accumulate assets over time.
Compound Interest:
- Having witnessed the snowball effect of compound interest, I emphasize the importance of starting to save and invest early. The power of compounding, where the principal grows due to earned interest, is a concept I've leveraged for consistent and substantial returns. My practical understanding reinforces the notion that time is a critical factor in maximizing the benefits of compound interest.
Inflation:
- Real-world market dynamics have highlighted the constant presence of inflation. Through various economic cycles, I've grasped the imperative need for investment returns to outpace inflation. Failing to do so erodes the real value of money over time. My experiences underscore the importance of choosing investments that offer returns exceeding or at least matching the inflation rate.

In conclusion, my firsthand experiences as an investment expert underscore the practical relevance of these fundamental concepts. Whether navigating through market uncertainties or crafting long-term investment strategies, these principles stand as pillars guiding successful investment journeys.