make the right investment decisions so you can buy a house

How To Make The Right Investment Decisions

 Investments are a great way for people who have sufficient funds and time to invest their money on a long-term basis. As an investor, it’s important that you understand what to do when investing because there will be many situations where investors may face some challenges while making any kind of decision regarding their finances. 

 There are two main categories of investors – those who want to earn more by investing as well as those who want to protect their wealth from losing value due to unpredictable circumstances like inflation or economic crisis (just like what we are experiencing in this turbulent time in 2022).

If you fall under one category, then this article is going to help you with how to make good investment decisions so that you don’t lose all your hard-earned money.

make the right investment decisions

When it comes down to deciding whether to buy something or sell something, most investors tend to follow only one rule – if I bought this product/service at a lower price than today’s rate, would I still consider buying? The answer should always be ‘yes,’ but the question itself reveals why these investors fail to achieve financial success. 

There must be other factors involved besides just comparing prices and taking advantage of short-term opportunities. A successful investor tries to look beyond the obvious facts and figures and takes into account various aspects, including risk, return potential, liquidity, and other aspects, before coming up with an informed opinion on a particular product. 

Let us now discuss each aspect mentioned above and see how they affect our approach to making good investment decisions: 

What You Need To Know About Investment Decisions

Before diving deep into how to make good investment decisions, let me begin with understanding what makes an investment worthwhile. An investment involves putting your capital (or resources) somewhere and expecting a certain amount back. 

This expectation has mostly to do with future earning possibilities. In simple words, investors expect to get returns either directly or indirectly out of their invested assets over a period of time. 

For example, say you put $100 dollars into a mutual fund that promises a 10% annualized yield per annum in 3 years. You also realize that you can withdraw your principal amount anytime without paying any penalties within 60 days after purchase. So, what does this mean exactly? It means that you would receive $10 every month instead of $8 since the total interest received would be equal to $30 ($20 + $10). 

Now, this doesn’t necessarily mean you’ve made 20 percent profit, but it does show how much additional income you could generate using this strategy compared to simply keeping your original $100 dollar deposit intact.

In addition to the above scenario, there are several things you should keep in mind while thinking about your investment options. These include:

a) Risk vs. Return Potential: When looking at a specific investment opportunity, try to find out how risky it is as well as how likely you are to gain profits based on past performance. Some examples here would be equity markets such as stocks and bonds, whereas others might refer to real estate, commodities, and hedge funds.

All types of investments come with different levels of risk and reward potential depending upon the individual characteristics of both buyer and seller. However, the general advice remains the same irrespective of the type of asset purchased. For instance, if you’re considering purchasing shares of Apple Inc. stock, it wouldn’t hurt to ask yourself, “how high” is the company’s valuation, what is the expected growth trajectory, and how stable is the business model.

b) Liquidity: One of the key considerations while choosing an investment option is the liquidity of the underlying instrument. Remember that the whole point behind investing is to maximize your gains while minimizing losses. Therefore, it becomes imperative to ensure that once you decide to take action, you can actually execute your plan quickly and easily. Ideally, you’ll want to choose an investment vehicle that allows you the flexibility to liquidate at least part of your position whenever you feel necessary. 

Otherwise, you end up having to wait until the next trading day to exit your positions and miss out on substantial amounts of profit. On the flip side, if you opt for an illiquid investment, you run the risk of missing out on huge gains.

c) Time Horizon: Most investors prefer to hold onto their portfolio for longer periods of time for better overall results. While holding your investment for as little as six months isn’t ideal, waiting too long can cause significant damage to your financial health. 

That being said, it’s usually advised that you stay away from highly volatile securities such as equities and derivatives. Instead, stick to less risky alternatives like government bonds, gold, cash, and treasury bills. Also, remember that the earlier you start saving for retirement, the sooner you’ll be able to reap benefits. Invest early enough and avoid unnecessary taxes.

d) Tax Implications: Taxes play a crucial role in determining the profitability of an investment. Depending on your personal tax bracket, you might pay a significantly higher percentage of the actual earnings generated by your investment than anticipated. 

Hence, it pays off to seek professional assistance if you’d like to minimize your own tax liability. A qualified advisor can provide valuable insights into finding suitable investment vehicles which offer favorable tax treatment and allow you to defer taxation till later stages. 

Another thing to note here is that if you are planning to retire very soon, you shouldn’t forget to factor in Social Security payments as well.

How to make money through investments during an uncertain market:

Now that we have discussed the key components of sound investment decisions, we shall move forward discussing how to make money through them during turbulent times. Let me first explain what uncertainty really means to investors.  Uncertainty arises when you cannot predict the behavior of a given situation in advance i.e. in terms of outcomes and consequences. Basically, uncertainty is defined as a lack of information pertaining to a matter. Since human beings generally rely heavily on probabilities to analyze events occurring around them, they often perceive randomness as uncertainty. As far as financial markets go, the uncertainty level increases dramatically during periods of extreme volatility. During such times, investors become hesitant to commit large sums of money to new projects fearing that they might never recoup the initial costs incurred.  Consequently, many turn inward and focus solely on preserving existing holdings rather than exploring new avenues. But even though it appears counterintuitive, it’s possible to benefit financially from such conditions. Here’s how. During uncertain times, it’s best to diversify your investment portfolio across multiple instruments. By doing so, you reduce the chances of suffering major setbacks caused by a single event.  Moreover, you increase the odds that some form of positive outcome happens regardless of the prevailing environment. Furthermore, you won’t suffer losses from selling your entire portfolio in one stroke.  Rather, you’ll be able to gradually liquidate your holdings and reallocate your capital elsewhere once the storm passes. Lastly, the fact that your portfolio contains a variety of assets provides further protection against adverse movements in the market. Even if one sector suffers losses, another one continues to grow, resulting in a net gain overall.

The bottom line is that you should maintain control over the flow of your money throughout the year by managing your investment portfolio according to changing market scenarios. Keep track of your expenses carefully and adjust spending habits accordingly. 

And finally, stay focused on achieving your long-term goals despite current market conditions. Your patience and persistence will eventually prove beneficial when things improve again.

How to manage risks in your investment

Risk Management plays a critical role in helping investors deal with uncertainties associated with investment activities. Simply put, risk management helps mitigate the impact of unexpected changes in the financial values of investment.  Risk mitigation techniques vary widely depending upon the context of the problem faced. They range from technical analysis tools used by traders to sophisticated mathematical models employed by economists and statisticians. Regardless of the method chosen, however, the goal remains the same – to eliminate negative impacts stemming from unforeseen developments affecting the security of the investment. For example, suppose you had decided to invest $1000 in a bank savings account yielding 5%. Assume further that you were concerned about rising rates of inflation and wanted to offset any loss by locking in your original $1000 investment for 12 months.  Using historical data, you estimate that the cost of living index rose by 2% annually between 1980 and 1990. Based on this assumption, you calculate that inflation averaged 4.5% during that ten-year span. With this knowledge, you determine that increasing the duration of your investment reduces the likelihood of experiencing a decline in its value relative to the benchmark. Thus, you conclude that extending your loan repayment period is preferable to reduce the size of your investment.  However, keep in mind that we are currently living in “uncharted territory” where inflation is super high, and governments seem unable to control it. Past history might not mean much in this case. Another common technique used by investors to mitigate risk consists of diversification, wherein they spread their bets among different sectors, countries, and industries. Diversifying ensures that no single area experiences a rapid deterioration in value, causing you to incur massive losses. At the same time, diversified portfolios also prevent sudden rises in asset valuations leading to excessive profits. Lastly, you should remain mindful of the following three principles while mitigating risk:

 i ) Never borrow excessively. Borrowing creates leverage allowing you to access larger portions of available funding sources. Leverage offers greater exposure to fluctuations in market valuations, thereby magnifying losses. Conversely, borrowing limits your ability to recover lost ground.

 ii) Be wary of hidden fees. Hidden charges such as transaction fees, late payment penalties, insurance premiums, maintenance fees, and brokerage commissions add up over the course of your investment tenure. Such expenses eat away at your hard-earned gains, leaving a minimal surplus for discretionary purchases.

 iii) Manage expectations appropriately. Don’t set unrealistic expectations and always take profit whenever you have achieved some of your minor targets

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