Setting your goals before you start investing or trading in stocks or other assets is crucial because they can be guides for getting you to where you want to go. These goals are also handy when putting together your investment strategy and for giving you a way to measure the success of that strategy. Once you have your goals and strategy, you should ensure they can lead to success when you start investing. Your investment strategy should, in addition to your goals, follow some investing fundamentals.
The Safety of Your Principal Amount
While it can and does happen, an investment is not supposed to lose money. It is, therefore, understandable that a crucial fundamental principle of a good investment strategy is ensuring principal safety.
Principal safety refers to the protective measures you put in place to ensure you do not lose your principal in an investment. Your investment strategy should be able to do this regardless of prevailing circumstances.
Do understand that, even with the best safety measures, investing remains risky and you can lose your money no matter what you do. Take the 2008 crisis, for example, where most people lost their investments even though they had safety measures in place.
Diversification
Diversification is one of the best ways to ensure principal safety and is critical to any investment strategy. It entails investing in different types of assets, asset classes, and markets.
For example, an investment portfolio might include real estate, stocks, bonds, exchange-traded funds, mutual funds, futures contracts, and options.
The investor might also have invested through different stock exchanges and markets globally. By doing this, they have excellent protection if something happens to a market, stock exchange, sector, or type of investment.
Remember that you should also have strategies within a diversified investment strategy to protect yourself. For example, you might sell the services of an option strategist to help you find the best time to enter certain contracts and whether those contracts would be right for you.
Once you have diversified your portfolio, check it regularly to ensure it performs as expected. You can also talk to a financial advisor so they can help you rebalance it if things change dramatically in the markets and options you have invested in.
Easy Liquidity
Many investors put their money into long-term investments that help them beat the market or grow at an appreciable rate. One of the problems you may encounter with this strategy is that it may not be as liquid as you might like.
Liquidity is the ease with which you can convert an investment option into cash. The main reason you might want a liquid investment is so you always have a source of funds if you need it for an emergency, for example.
Let’s say you have invested in trading options. The parties involved might have agreed that neither party can revoke the offer to buy or sell until a specified time. In such a case, that investment option would not be as liquid as you would like.
One good thing about illiquid investments is that you can use them as security to secure the funds you need. For example, you might have a real estate investment that you are having difficulty getting rid of. You can use it to secure a loan while you try to sell it. Remember, you will need the lender’s permission to sell it, and you might have to pay them first before taking the rest of the money from the sale.
Capital Appreciation and Compounding
All your investment options should keep growing as the industries and companies they belong to grow. Investors typically invest in growth stocks, stocks of fast-growing companies, to take advantage of this.
You should always consider investments that lead to compound returns. Compound returns are much better than linear returns because they often outpace inflation, and the money grows fast regardless of the time horizon.
Taxation
Tax is a crucial consideration when investing because it can affect your returns. You should, therefore, think carefully about the tax implications of the investments you want to make before making them.
Taxation should be a bigger consideration for small-income investors and beginners, whose returns can be wiped out by taxes if they are not careful. The best way to ensure this does not happen to you is to talk to a financial advisor or accountant. They will help you understand the tax implications in your jurisdiction and the markets you would like to invest in.
Conclusion
Investments remain one of the best ways to build wealth. That said, you should have goals and strategies to ensure your investments give you the returns you are looking for. How you structure your portfolio, the investments you pick, and where you consult an expert before and after investing will determine your success.