Basic investment strategy
Investment is a hedge against insecurities of the future - from inflation and increased funds needs or better wealth management. The power of compounding is what makes investment attractive. Your future wealth is decided largely by the prudent investment plans you undertake now. Investment always comes with an element of risk. It is for you to weigh the level of risk with possible rewards. Understanding risk is the cornerstone of investment fundamentals.
 Diversification is the key to good investment management. Spreading your assets and investments across various groups spreads the risk. Short-term cash deposits or property investment or stocks and shares - you can diversify your investments based on your comfort level. Investments such as bank deposits earn a fixed interest. Stocks and mutual funds promise more growth potential. When they do well, you stand to gain because you earn money on the money your investment makes. Investment in property can bring you handsome returns but over a period of time. Diversifying investments ensures that you don’t lose everything if a particular investment doesn’t work well.
Horizontal diversification
Horizontal diversification is when a portfolio is diversified between same-type investments. It can be a broad diversification (like investing in several NASDAQ companies) or more narrowed (investing in several stocks of the same branch or sector). The broader the diversification the lower the risk from any one investment.
Vertical diversification
Vertical diversification is investment between different types of securities. It can be a very broad diversification, like diversifying between bonds and stocks, or a more narrowed diversification, like diversifying between stocks of different branches.
While horizontal diversification lessens the risk of investing entirely in one security, vertical diversification goes beyond that and protects against market and/or economical changes.
Investment Planning
- Decide the amount that you can set aside for investment. With right planning, you should be able to set aside and build up an investment fund. Ensure that you have built sufficient cash reserve to meet short-term emergencies. Plan your expenditures so as to redirect funds for investment. Put away a percentage of your pay increase to long-term savings investment.
- Take a broader perspective when planning your finances. Chalk out financial goals such as child’s education, retirement or buying a home. Analyze your current situation and determine your investment plan. You can consider taking the guidance of an investment advisor. He could help in tailoring your investment to suit your requirements. This would work well for those strapped for time and those who are not well-versed with financial planning. Investing in shares is not everyone’s cup of tea.
- Be realistic and reasonable about expectations on investments. While some may far surpass your expectations, sometimes investments may not pay off as well as they promised.
- Plan your tax liabilities too when overseeing your investment plans. Consider capital gains that may come into effect.
- Before placing your money on an investment, weigh the cost of the investment product. Check out how much you need to pay as fixed cost and percentage of investment.
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