Have you ever wondered how to invest on the financial market?
If you have, you are not alone. Actually, plenty of people don’t know how to behave in this world and end up making common mistakes. Typically, people think that in order to invest you need extremely advanced and sophisticated knowledge.
Many believe you need “the right tip”, i.e. an expert telling you on what securities you should invest. Let me tell you straight away: nothing further from the truth!
Here are classic mistakes by all those who do not know where to begin to invest on the financial market.
Mistake #1: starting from the yield and not the risk.
We are too used to have certainties but, unfortunately, there is no certainty of yield on the financial market.
So why is it the very first thing everyone looks for?
The classic saying, “I would like to earn some money, but without risks” is the same as saying “I want to have my cake and eat it”… so very sorry, it’s a paradox you can’t overcome.
To avoid the usual assessment value, the first thing you should start from is risk assessment.
I know, risk is scary.
The very word triggers uneasiness.
All we would like to do is to cut it out completely. But actually, in the finance world this concept is overturned.
The risk is an ally, a loyal friend taking us in the process of investment showing us the best path to take.
Indeed, risk is the “safest” measure we can calculate. In order to do that, the very first thing to face is an analysis of yourself.
Before approaching the financial markets, you should understand your risk profile. To do so correctly, you should ask yourself:
How much capital am I willing to invest? All or a part?
Of such capital, how much am I willing to lose? A part? None?
What level of “potential” loss would still make you sleep at night?
Beware, if you have answered “zero” to the second and third question, the world of financial investments is not cut out for you.
Some risk is absolutely normal, and healthy, too.
Moreover, I want to add that, as far as the protection of your capital is concerned, if you think the financial risk is the worst one, you’re way off.
When you reflect on your assets, the entrepreneurial and insurance risks are way more dangerous.
Unfortunately, the common perception is far from reality and many are more scared to invest a little money on the financial market than of getting injured which will make them permanently disabled, and unable to work (do you know anyone with an insurance for that?)
Mistake #2: to invest I need to know the “magic” tool
Many people are still convinced that the world of finance is ruled by a small group of people with relevant privileged information.
In addition, this elite of investors always know where to invest… but simply keep this information to themselves.
Well, if you think this is true, I’m sorry but financial investments are not your cup of tea. The truth is that no one can predict the future, especially on the financial markets.
Moreover, there are no dark forces holding the reins of finance, as a puppeteer would with their puppets.
Financial markets evolve according to economic cycles and to the events of the social, political and economic world. That’s all.
There is no financial tool or definitive security that will turn you into a millionaire (or billionaire) more than others.
So, what is the correct approach to financial investments?
Easy, by establishing an effective strategy.
Having an investment strategy means reflecting on your goals, setting your target and creating a portfolio of financial tools to reach it.
Thank to your risk analysis, you will keep potential losses under control and avoid deplete your capital (which is why you should do it before you invest).
Having said that, we should underline the fact that there are plenty of ineffective financial tools.
But once you learn to recognize them, you may use the effective ones to invest correctly on the financial markets.
The correct investment strategy entails the following steps:
- Define your risk profile
- Define your investment targets
- Define a timeframe
- Choose the financial tools to create the best portfolio.
See how the tools selection only ranks 4th?
Mistake #3: selecting the correct financial tools
It may not seem so, but not all tools are the same.
There are effective ones and others that belong in the trash.
But the key question is: how can I recognize which I should use and which I should not?
There are different ways to do it, some are very simple, too.
I’ll show you a very effective one, but which is rarely considered.
To pick an effective financial tool, you have to look at its costs. Indeed, you need to see how much it costs in terms of fees and commissions.
You need to know that the saving industry has literally made a whole lot of money in recent years, by exploiting the disparity of information available for those offering and those purchasing financial tools.
Believe it or not, plenty of tools end up having such high costs that they cancel the actual yield obtained, by crushing it under the weight of impressive commissions.
Usually, you may recognize ineffective tools as they are usually “packed” in stiff and cumbersome structures.
One classic example is funds’ funds, i.e. investment shared funds which hold within them other investment shared funds. Another example is unit and index linked investment POLIZZE, which are truly widening the balance sheets of investment companies.
Often hidden within long and complex information prospects, they cover complex commission calculation systems which only reduce the yield and, in extreme cases, the capital initially invested.
If you want to pick effective financial tools I strongly suggest considering the commission aspect. On that note, a few of such costs are hidden and they are called “implicit costs”. Unfortunately, you won’t even find them within the 543 pages making up the information prospect. There is only one way to discover them.
You have to look at the graph depicting the trend of the financial tool, by comparing it with its term of comparison.
You haven’t understood, have you? I’ll explain better. In finance, you always need to have a term of comparison to assess the quality of an investment.
Saying you have earned a +5% doesn’t mean anything, because if the markets have achieved a +10% yours was not a good investment. The same applies if you have lost -5%, it is not necessarily something negative if the markets have fallen by -20%.
Thus, even to assess financial tools you need to use a term of comparison. Such comparison is called benchmark and it is an index or a market you keep under control for comparison reasons. If you compare the trend of the financial tool with its Benchmark’s, you can see right away if there are differences.
If the gap is wide, you know there are implicit costs and you can give a call right away to your “counselor”…
Of course, there are other ways to assess a financial tool, but this is already a very good method.
In this article, I’ve explained how you can avoid 3 classic mistakes of those who do not know how to invest on the financial markets. Already by overcoming these obstacles you will be a step ahead of the average investor.