To mark the start of the World Investor Week (October 1 - 7), The Edition brings readers a dose of financial insight from a student 'guest writer', courtesy of Maldives Stock Exchange.
Benjamin Franklin famously said that an investment in knowledge pays the best interest.
Now, one may consider this as meaning, that regardless of your occupation or income - you can take charge of your financial future; through investor education.
It does not matter how much money you have - if you learn to manage your money you are already ahead in the race. There is no shortcut to attaining wealth; the idea is to consistently (albeit slowly) increase earnings.
Many of us are like Michael Jordan, that is, we are not born with the ability and the know-how to dunk, let alone dribble a basketball. Although the sports superstar rose to become one of the most acclaimed players of all time, he had humble beginnings that included being cut from his high school basketball team.
Similarly it is unrealistic to assume that one would be able to earn a significant return in the first year, or on their first try.
In the unlikely event that all of your initial investments make a sizeable return, you are probably basking in your own brilliance and kicking yourself for not buying more.If you subsequently lose on your investments, you might simply just kick yourself, period.
We often forget that 'to err is human' - and in the agony of defeat, tend to give up on our dreams of financial prosperity. The trick is to bear in mind that there is a learning curve, even to the art of investing.
For an investor, the decision to sell a stock is almost as difficult as buying one - this is why an investment strategy is necessary, even one that is somewhat flawed.
Your strategy will evolve as you learn the tricks of the trade through the market metamorphosis.
Financial advisers are gurus for investment direction. Seek advice; incur less risk. It wouldn't hurt to familiarize yourself with important documents such as annual reports and financials of companies, that you could potentially invest in.
With all that in mind, I reckon you have already pressed pause on reading this article and invested in your very first security. Good for you!
Before you carry on multiplying your investments, here are a few things that should be taken into consideration.
Simple enough right? The tricky part is that we hate to admit it when we go wrong. Investors should have the ability to admit the poor investment decisions, and move on to plan B.
Tying your emotions to your investments and hoping it will pick up soon or thinking that you will sell it when you get the initial investment amount is where we go wrong.
While it is okay to make losses (everyone does), we should learn from our mistakes. That said, it is equally important to stick with your winners: the key to investing is to stay invested.
Over the years I have experienced having invested in a couple of bad eggs myself. Yet common sense dictates that you should not let one bad egg ruin your entire basket. Since, I have learnt to always diversify my portfolio, by investing in a variety of securities.
The basis of diversification is a rather optimistic idea suggesting that even if one or two of your investments go down, overall, you will still make a gain on your total investment.
It does not matter whether you start with $10, or $10,000 - success does not come easy. Think big on a broader scale of investments to increase your gains.
You might wonder, 'does that mean I don’t have to take risks?'
As much as I would like to say yes, the answer is no. Investments are often risky. Diversification is a way to minimize risks - not eliminate it.
Don’t think you wasted valuable time reading this for no good reason just because I am now telling you to watch over many securities instead of just one. It must be understood that the avoidance of struggle is a struggle in itself.
You have to make an active choice to decide, commit and succeed.
Risk typically goes hand-in-hand with returns. This means the riskier the investment, the higher the expected return.
Different people are equipped to handle different levels of risk. For instance, as you jump from an airplane 100 ft in the air, I might hang onto the seat of the same airplane and scream for dear life! And that's okay, it is simply not my cup of tea .
Akin to this, you might be comfortable navigating the highs and lows of the financial market, while I may find an uncertain and aggressive investment strategy to be quite the headache.
Three questions that can help you identify your appetite for risk are:
How much risk can I stomach?
What is my investment goal?
What is my investment timeline?
Here there is no right or wrong answer. However, knowing how much risk you can afford to take, is sure to serve you well.
Congratulations! You’ve made it through this article unscathed, better armed, and better equipped to take on the stock market!