Wise investment is a byproduct of strong stock fundamentals of investors. Young adults often get demoralized while making wise investments for fear of risks involved in investing. It must be understood that risk level in stock investment is a result of ‘un-informed and un-planned’ decisions. If we can plan investment and take a informed decision, risk can greatly be reduced. Wise investment has ability to pay returns year after year for young adults. We will discuss here age old tips of making wise investment that young adults can practice in their day to day life.
Wise Investment Ideas (1): First Identify financial Goals
Wise Investment is not an option it is a necessity. Wise people practice investment to meet their financial goals. Every body has their own personal financial goals of life. The amount of money people get from their pay cheque is not always sufficient to meet these goals. Hence people practice savings and investment meet their goals. Saving and investment allows money to grow faster and in turn it helps to meet the financial goals. Unless one knows that what is their financial goals they will never save and investment for it beforehand. So the first Investment advice for young people will be to be aware of their financial requirements. These financial requirements will become their financial goals. Once the financial goal is quantified, one must set their time lines. After setting the time lines, it must be verified that whether the goal can be achieved from existing savings. If answer is ‘NO’ then it mans one need to to invest their savings. A wise investment will multiply the savings faster and hence enabling you to reach your financial goal. One such wise investment option that can multiply the saving faster is stocks.Stock are risky but if one stays invested for long term in stock the risk can greatly be reduced. When we say long term it means 5 years or more. Wise investment ideas asks investors to buy quality stocks at a undervalued price levels.
Wise Investment Ideas (2): Know Your Risk Taking Capability
One of key skill that can be learnt to make wise investment is to understand ones risk taking capability. Let us discuss a very simple method to evaluate any persons investment risk taking capability. A wise investor takes all investment decision being completely aware of his/her risk taking capabilities. Lets take an example, say a person earns around $800 per month. Out of this he is able to save some $175 per month. Ideally his risk taking capability becomes $175, but it not always like this.
- Unplanned Expenses - Out of $175 he has observed that in last 12 months he has drawn on average $65 form this savings. Means his risk taking capability is reduced to $110 ($175-$65) due to these unplanned expenses.
- Emergency Expenses - He has also observed that he needs to keep at least $45 as his cash reserves each month for managing emergencies. Hence his risk taking capability becomes $65 ($110-$45).
- Money You will never need - This $65 is that money that even if it gets stolen it will not affect the living standard. Once one knows this figure (like $65 that the example man will never need), this quantifies as risk taking capability. It means, though the person earns $800 and he saved $175, but his risk taking capability is only $65. This money he will never need to maintain his standard of living. There are people for whom risk taking capability can also be in negative. Such people should not venture into stocks for investments. For such person, wise investment will be debt linked options and never stocks. But very often the reverse is true. Only such people (who has no spare money), puts their money into stock market. This is not adviseable. One must calculate their risk taking capability and then ventire into stocks.
Wise Investment Ideas (3): Learn to Value Stocks
Even if someone has enough risk taking capability, but still they may fail to make a wise investment. It is essential for young adults to know how to value stocks. No body wants to invest in stocks that will make no money for them. It is possible that two stocks have the same price but it may not have the same value. An expert once told me that a wise investment is a byproduct of how well we know to value stocks. He also said “value of stocks is not only decided by its price but also on lot of other contributing factors like sales turnover, earnings, dividend, product line, brand name, management etc”. Stock can also be quickly valued by comparing its market capitalization with market best know stocks. Companies with a big market capitalization will generally means less risk for shareholders. People who just look at market price of stock can never make wise investment in stocks. They are often found regretting their investment decisions. At the end they cry foul that stock market is risky. But in reality they made their investment loss making themselves by not knowing how to value to stocks. Stock market is never risky, it the bad decision of the investor that makes it risky. In order to make a wise investment one shall not rely on an outsider for stock suggestions. One must develop their own skills of stock valuation.
Wise Investment Ideas (4): Diversify your investment by investing in top companies
Its good to know how to value stocks. Buying stocks at right valuation is good. But this does not assure complete risk management. Learning to diversify ones investment is also essential. Investment diversification asks us to be open to invest in best investment options available at that moment of time. This will minimize the risk of partial or total loss of capital. It is easy to understand that the probability of losing all capital invested is less if capital is distributed in a number of investment options. Better will be to distribute ones money among stocks, real estate, precious metals, bonds, deposits, etc.
Wise Investment Ideas (5): Try to Recover Initial Investment as soon as possible
Perhaps this is the most wise investment idea I got in long time. This is my favorite investment tip of all. Let us take a small example to understand this concept of ‘recovering initial investment’. Suppose you have invested $500 as an investment in stocks ($10 each, 50Nos). After investing these $500, you waited for say 5 years. After lapse of 5 years you observed that $10 has got appreciated to $20. This is the time to recover the initial investment of $500. At this stage you can sell 25 Nos shares to recover $500 (25x$20=$500). Once you can draw the initial investment, you can invest in a less risky investment option like a fixed deposit etc. You must remember that the balance $500 is still invested in stocks. Let this money stay invested in stocks for indefinite period of time. In this time period let the stock earn dividends and also let it market price compound. You can take more risk on this money as you have already recovered your principal amount.