Question: Why is Warren Buffett a billionaire?
Answer (well, part of the answer): He never, ever invests in things he doesn’t understand.
In this crucial fact there is a lesson for us all, from first time investors all the way up to city hedge fund managers, and that message is; understand the thing you are dealing with and it is far less likely to bite you.
For many people, the thought of investing is a daunting game of chance. They imagine the cut throat world depicted in movies like The Wolf Of Wall Street.
The reality is, for the most part far tamer and often the best method for how to plan for retirement. It goes without saying that the value of investments can go down as well as up and buying any kind of investment involves an element of risk. There are many good investment opportunities out there, but few, if any guarantees.
However, if you understand the potential risks and rewards of any kind of financial investment, be it shares, bonds investment or funds, you can attempt to minimise the former and maximise the latter.
The Two Primal Forces
Investors, without putting too crude a point on it, are motivated by two forces, greed and fear.
All investors are looking to maximise the return on their investment, but all investors are instinctively fearful of losing the sums they have taken a calculated risk on.
Knowing when to listen to these two motivating forces is an important part of the art of investing.
Most successful investors have a clearly structured plan for their investments, with goals laid out well in advance.
Developing a strategy is no guarantee of success, but an absence of a strategy is to almost ensure failure (or just very mediocre results).
The best investment plans are always realistic ones, especially if you are starting with a small amount of capital.
The best short term investment is always advice, getting some expert help means you don’t have to reinvent the wheel, you can learn from people who have already been successful on the best way to invest.
Part of any investment strategy should focus on how much risk you wish to be exposed to and what kind of rewards you are anticipating making as a result.
Little and Often
When you have a strategy you feel comfortable with (that involves an acceptable level of risk), then you can get down to the regular business of managing your portfolio.
This involves a regular review of your investments, closely tracking the shares, funds and bonds you have purchased.
You will need to ask whether the investment is performing for you, or whether it can be liquidated and your assets moved elsewhere.
You will also need to check whether the account they are kept in (normally a stocks and shares ISA) is paying you sufficient returns.
Week in, week out, you may have to do comparatively little, but the most important thing to do is to get into the habit of consistency, checking your investments six months later is normally a waste of your time.
If you are new to investing, or would like to develop a portfolio, you can access impartial advice here.