By Kethosinuo Tepa
If you wish to start investing, it is essential to possess a fair understanding of the basics of finance and investment. The field of investing is large, and there’s an infinite amount of information you can learn about investment from the internet. So while we cannot learn everything there is to know in one day, here’s a quick overview explained in simple words that you may wish to consider before starting your investment journey.
Savings- The first lesson about money is learning how to prioritize savings. If savings comes after expenses (Income minus Expenses equal to Savings), it is just a by-product. One needs to apply the formula of “Income minus Savings equal to Expenses” where we first save before paying any other bill, i.e. the first thing to be accounted for from the salary is savings.
Why invest?
While saving is the first step to building wealth, putting your savings to work through investing is typically the next step to growing that wealth. Investing is not a ‘one size fits all’ game. It can mean different things to different individuals depending on their financial goals. For some people, it can mean securing future benefits such as their health or retirement, while for others it may be a means of generating income from profits. It generally means putting funds or capital into a multitude of assets in the hope that you will gain returns from them in the future. The money generated from your investments can provide financial security and income.
Assets and types of asset classes- Assets are anything that puts money in one’s pocket and anything that takes money out of the pocket is a liability.
Various types of asset classes-
- Equity- Equity investing is the buying and selling of stocks in publicly traded companies. It is volatile and returns are not uniform
- Debt- It refers to investments in debt securities that offer investors fixed-rate interest payments over a specified time frame. The primary appeal of fixed-income securities is their relatively low risk. (Example- FDs, bonds NCD from governments, debt mutual fund, etc)
- Gold- Physical gold can be bought or invested in gold ETFs, government gold sovereign bonds, etc
- Real estate- Any physical space could be real estate, like property, shopping malls, office buildings, etc.
Asset Allocation
There is an investment strategy known as asset allocation which refers to the diversification of your investment portfolio across different asset classes, e.g. equity, debt, gold, etc. Asset allocation aims to balance risk and returns based on your risk appetite, investment tenure, and financial goals.
The main asset classes have different levels of risk and return, so each will behave differently over time. As such, asset allocation is important because it provides stability to your portfolio and balances risk and returns. No simple formula can find the right asset allocation for every individual. However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make.
Bottom line
Good investing begins by investing in yourself. Learn and research the types of investment you are interested in. Risk is directly related to investment decisions, so carefully analyze the area where you desire to put your money. Understand your objective of investment, whether it is to support you after retirement, or is it to buy a home in the future, or is it to meet your children’s expenses. If your objectives are clear, you know how much to invest and for how long to invest. Get your emergency savings squared away. And with those key financial tools in action, you can start investing with confidence—putting the money you have today to work securing your future.
Some books recommended by Piyush Rakhecha, a financial planner and wealth coach are Rich Dad, Poor Dad by Robert Kiyosaki, Cashflow Quadrant by Robert Kiyosaki, Psychology of Money by Morgan Housel.
Reference:
Eyeway Encounters on Investment: https://youtu.be/HQoskya_ZI0
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