The investing world can be an intimidating one, especially for those new to the game. You want to grow your portfolio with as little risk as possible, but you have no idea where to start. It’s a common fear, but one that can be quelled by buying shares in socially responsible businesses. Here are the golden rules of investment.
Understand the object of your investment
As an investor, you should only invest in things that you understand. This doesn’t mean you should only invest in industries of your expertise. However, an investor needs to understand how an investment functions. When investing in companies you should quickly understand how the business model of the company works and how it will generate revenue in the future. To do this, you need to be able to break down the business model to the basic ratio.
Investments should be made while keeping the long run in mind. Investors who are only out for short-term profits run the risk of losing their patience when exchange rates fluctuate and thus make high losses. Moreover, the performance of the portfolio sinks every time an investor rejects a position and adds a new one. Instead, investors should invest in assets that they want to keep long-term.
Pay attention to valuations
One key figure is especially important to investors: valuation. Company valuation plays a key role in the question of whether or not the investment is lucrative, particularly in enterprise participation. Investors don’t want to pay more for the earnings of a company and its future growth prospects than necessary. There are many different ways to calculate the value of a company. You can use detailed financial figures to calculate the company value of listed companies by looking at the development of the company in recent years. Based on this, you can derive a realistic forecast of how the company could develop in the near future. In venture capital, i. e. startup investments, company valuations are subject to a wider range of fluctuations, as there are often no reliable financial figures. But here too, there are methods for determining the company value. This value is a direct indicator of whether and how much an investor should invest in a company.
Calculate real return
Ultimately, the return is the decisive figure by which an investor chooses whether or not an investment is lucrative for him or her. The focus here should always be the real return, i.e. the return adjusted for inflation, transaction costs, and taxes. Nominal returns can cause confusion because only real returns can express the increase in purchasing power without alteration.
Pay attention to timing and position size
Investors need patience. After identifying a good investment, the next step is waiting for the right time to get involved. Sometimes that can be right then and there, other times it can be months or even years later. But when the time comes, one has to be ready for it. Don’t jump on the next best opportunity; the market offers enough chances. When an opportunity is presented, the next question is how high the stakes are.
Don’t trust trends
Following the masses is not good advice for an investor. By the time even the last investor has heard of a worthwhile investment opportunity, the expected profit margin will already have become very low. Investment legend Warren Buffet once said: “I will explain how you can become rich. Be nervous when others are greedy. And be greedy when others are nervous.” Psychological effects play an important role in financial markets.
Investors should never place their capital in only one single asset. Instead, the portfolio’s risk should be spread as widely as possible by investing in assets from different sectors and with varying risk/return ratios. This approach is called diversification.