How to Choose a Good Investment? – Basic Finance Literacy

If you are a beginner in investing and confused about how to choose a good investment? Luckily, you do not have to wait until you have saved a large amount of money. You can’t start investing even with a small amount. It is not about having hundreds of thousands of dollars, even a little can grow over time. The important thing is to start early and let your investment grow slowly.

There is a famous dialogue from the board game Othello, “A minute to learn….. a lifetime to master.” This concept applies to your investment selection. It’s quick to acquire knowledge of the basics, but it can take a lifetime to learn every detail. Investors should be aware of these basic ideas if they want to improve their investment selection skills.

The 80/20 Rule

The 80/20 rule, also known as the Pareto Principle, is a concept that suggests 80% of results are achieved with 20% effort. In the context of investing, this rule can be a useful tool to help you focus on the most impactful decisions that drive the majority of your investment success. This rule can be applied to investing so that we can focus on the key concepts and strategies. In investing, it means;

• 20% of your investments may generate 80% of your returns.
• 20% of your time spent researching may yield 80% of your valuable insights.
• 20% of your portfolio may carry 80% of your risk.

Know Your Timeline

You need to understand your timeline to choose a good investment. The length of time you expect to hold the investment before it reaches the assets is called your timeline or investment horizon. When you invest, it is important to plan to leave your money in those investments for a long time without touching them. A good return is expected, but usually, this is only possible with patience and long-term planning.

When investments have many years to grow, they are more likely to recover from stock market fluctuations. It is possible to make money quickly, but it is not very likely. As renowned investor Warren Buffett once said, you can’t have a baby in one month by getting nine women pregnant. It means that some things, like investing, simply need time and cannot be rushed. 

The most important lesson is that investments take time to mature, and you must be patient. You increase your chances of getting a respectable return, even when the market is volatile.

Choose the Right Asset with the Right Knowledge

Spreading your investment funds among different investment types, each of which is a fraction of the total, is called asset allocation. This method reduces risk by spreading your investment across multiple markets that may not necessarily move simultaneously to choose a good investment.

For example, you could invest half of your funds in bonds and the other half in equities. You can add additional types of investments, such as real estate, commodities, forex, or foreign stocks, to diversify your portfolio. 

If you are thinking about how to choose a good investment decision, it is crucial to know how much risk you are comfortable with to figure out the right mix for yourself. If losing money temporarily gives you deep anxiety, you might want to focus more on safer investments like bonds. But if you are okay with taking risks for the opportunities of higher long-term growth, then stocks are the best options for investing.

It is not about choosing just one or the other. Even the most careful investors should have a few safe stocks, knowing that their bonds will balance out any losses. Additionally, holding bonds can help protect investors from significant losses, even the most daring types. 

There are two main types of investments: traditional and alternative assets.

• Traditional assets include funds, bonds, and equities. Money refers to money you keep in the bank, such as in savings accounts or certificates of deposit.

• Alternative assets include everything else, like commodities, real estate, foreign currencies, art, derivatives, venture capital, special insurance products, and private equity.

A mix of stocks and bonds, along with some money savings, is a good strategy for most people. These are easy to understand and manage. Investing in alternative assets often needs a lot of specialized knowledge. For example, if you are an expert investor, you might be confident to choose a good investment. But if you are not an expert, it is usually better to stick with traditional investments like stocks and bonds, which are simpler and less risky. 

Balancing Stocks and Bonds for Good Investment

If most investors can achieve their financial goals with a mix of stocks and bonds, the big question is: how much of the two should they choose? To get the answer, we can look at history.

If you can tolerate high returns and are looking for better returns, investing primarily in stocks is a smart option to choose a good investment. Stocks have historically delivered significantly higher returns than other investments.

The author Jeremy Siegel said that a portfolio made up mainly of stocks is a smart choice. However, for those who are more careful and prefer less risk, bonds might be more comfortable, even though they generally offer lower returns. 

A balanced investment strategy mixes different types of assets, like stocks and bonds, to manage risk while aiming for good returns. The money is split between stocks and bonds, often equally or with a slight preference, such as 60% in stocks and 40% in bonds. These portfolios may also hold a small amount of money in a money market account to guarantee immediate access to funds when needed. 

Understand Technical and Fundamental Analysis to Make Good Investment Decisions

You can choose investments for your portfolio with two strategies to choose a good investment: technical analysis and fundamental analysis. Let’s break down what these terms mean, how they differ, and which one might be better for most investors.

Technical Analysis:

Technical analysts study large amounts of data to predict which way stock prices will move. Their primary focus is on past price changes and how much a stock was traded. Unlike other investors, technical analysts do not pay attention to things like government policies or overall economic trends. They believe that stock prices follow patterns, and by identifying these patterns, traders can make profits by timing their trades. 

Fundamental Analysis:

Fundamental analysts focus on the true value of a stock. They look at factors like how well the industry is doing, the quality of the company’s management, its revenue, and its profit margins. Many of the ideas mentioned here are important to fundamental analysts.

On the other hand, technical analysis is more about using lots of data and numbers. For most investors, fundamental analysis is more practical and makes sense in the real world. 

Read More: What Should You Consider Before You Invest?

Conclusion

Investing is more than just setting money aside; it is about managing your funds wisely so that their value increases over time. Even though there is the risk you might lose some money, investing is still the main way people save up for big goals like buying a home, a car, and a comfortable retirement. 

Before investing, having knowledge about good investment is important for making investment decisions. If you want to know about how to choose a good investment, This article is perfect for reading. Please share this article with your friends and close ones.  

FAQs: How to Choose a Good Investment?

What is the  120 Rule in Investing?

The 120 rule in investing suggests subtracting your age from 120 to determine the percentage of your portfolio that should be in stocks. As you age, the remaining percentage is usually invested in bonds, balancing risks and growth potential. 

How Do I Decide How Much to Invest?

Decide how much to invest by evaluating your financial goals, risk tolerance, and time horizon. Ensure you have an emergency fund, convert essential expenses, and avoid over-committing.