Guide for Good Investors: How Can I Become a Good Investor?
The significance of financial objectives
Your financial objectives may vary based on your own circumstances.
Setting aside money for certain objectives, such a vacation or an impending automobile purchase. Or perhaps getting ready for unforeseen expenses like medical costs. These are temporary objectives.
putting money down for a future child’s college tuition or a new home. These are intermediate-term objectives.
putting money aside for retirement after 15 to 20 years. This is a very long-term objective.
Once you’ve determined your precise objectives, put them in writing.
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Horizon of time
When it comes to retirement, the time horizon you have when you begin investing will affect the investments you choose to make. A different kind of investment will be needed if you make your first investment five years before you retire, as opposed to thirty-five years later. When you have a shorter time horizon, it is generally advised to invest in lower-risk items, especially if you have saved a significant amount of money for this purpose. Products like corporate or government bonds may fall under this category. However, if you have more time to invest before you retire, you can think about riskier products like stocks, shares, and equity mutual funds because you still have time to make money and even if your investments lose money in the short term due to market fluctuations, you will have time to recover.
Your level of risk
Your ability to take risks and your overall risk tolerance must be taken into account when determining your risk profile. Demographic characteristics like your age, salary, amount of money amassed, number of dependents, etc., can be used to assess your risk-taking ability. It goes without saying that your ability to take risks will decrease with age, the number of dependents you have, or your total income and wealth, and vice versa. Your level of comfort with taking chances is reflected in your risk tolerance. Your personality is the only factor that influences this. While some individuals are conservative, others are risk-takers—in fact, some people thrive on taking chances. Generally speaking, it’s a good idea to match your overall risk tolerance in life to the risk you take when making financial decisions. This will help you stay faithful to your strategy over time and control your emotions and worry.
Aspects related to emotions
Investments like stocks, shares, and equity are susceptible to value swings, or volatility, and are correlated with market movements. You should, however, avoid panicking if you have specific financial goals over time, as this could lead to you selling some of your investments before the time is right or even making drastic course corrections when they are not absolutely necessary (because there is still enough time and opportunity for your investments to recover). The investing choices of others in one’s immediate vicinity, whether they be friends, family, or coworkers, can also have an effect. If they make particular choices, those around them may become enraged and make similar choices without thinking things through as thoroughly as they usually do. Experts advise that when you make investing decisions, you should be in a generally calm and collected frame of mind. Your choices might not be the best ones if you’re really joyful and euphoric, or if you’re terribly depressed or angry. Therefore, without emotion, continue to accumulate your investing dollars and adhere to your own investment strategy.
Changes in life
Unexpected financial repercussions may result from unforeseen life changes. You could have to pay for your bills till you find another work after losing your current one. Or perhaps there have been some unanticipated family circumstances, and the unexpected financial strain has left you feeling overwhelmed. You will be well-equipped to handle the majority of these unforeseen circumstances and the ensuing financial crises if you have developed a sensible financial plan that involves keeping a sizable emergency fund and you are able to follow it.
Outside influences
You are now aware of the individual considerations that should be made while investing. You should also take into account the external ones. These consist of:
Levels of inflation: To help you accumulate true wealth, your investments must generate returns greater than the rate of inflation.
Economic cycles: Any increase in the value of assets will be slowed down by periods of slower growth that may follow times of great growth. You shouldn’t cash out on the spur of the moment and should be ready for this. Adhere to your strategy.
Geopolitical risk: Any military conflict, general election, or political regime instability might cause investment values to veer off track.
Important Takeaways
Consider your financial objectives, time horizon, risk tolerance, emergency readiness, and capacity to handle market volatility before making an investment.
Take into account outside variables as well, such as political developments, economic cycles, and geopolitical risk.
Once you have a well-thought-out investment strategy, follow it as closely as you can. If you need to change your course, make sure it’s for the proper reasons and not out of emotion or whims.