Successful investing is mainly common sense. Think about what you are doing and why, and then make common sense decisions because it is your money. To begin with modest assets and build a fortune obviously requires thrift. Thrift has to become part of your nature, part of every investment decision you make. Be a lender, not a borrower. If you want to become wealthy, adhere to a family expense budget that includes a large amount of savings.
When you invest your money, you put that money at risk. The risk is that you might lose some or all of the money. The amount of risk you accept is up to you. Generally, the more risk, the larger might be the reward. Buying a ticket in the lottery is an investment, but the risk of losing all of your investment is so great that you should invest only a small amount.
The two most important money management risks are inflation and volatility. Inflation is erosion of purchasing power over time. The $100 your grandmother gave you 25 years ago will not buy as much now as it did then. Interest bearing accounts are more prone to inflation risk. Volatility is the rise and fall in value of your investment. Stocks are a good example of volatility in an investment. The real risk is that you will not achieve your financial objective.
Most people don’t fully understand investment risk so I ask clients a number of questions related to risk and then I do a “risk profile” on each before I suggest investments. You should understand your own risk tolerance.
Part of common sense and investing is knowing how each investment works and understanding its risk:
Stock represents partial ownership of one company; your investment depends on how the company does.
A bond means you have loaned money to a company or a government. You get paid interest until the bond matures and then you get your original investment back. Whether you get your interest and your money back depends on the company or the government.
Rental real estate is owning a home that you rent to someone else. There are a lot risk factors. The reward is the rent and the appreciation of the property when you sell.
There are many, many other investments you can make. Do your homework and work on mitigating the risk by spreading your investments around.
Other articles by this contributor:
She’s 20 and Saves $500 a Month
The Only Two Things You Need to Know To Be Financially Successful
Let’s Get Smart About Taxes