Sound investment decisions enable the growth and preservation of wealth over time. In this article, Dan Calugar, an experienced investor, provides an overview of seven time-tested rules and recommends investment decisions that can lead to lifelong financial prosperity.
1. Embrace calculated risks: To be a successful investor, you must learn to identify and define your risk appetite. Risk is an essential element for financial growth. Your circumstances will dictate the proper amount of risk for your growth strategy. Risk-averse individuals must often set aside their fear of failure, while reckless people must temper their inclination to gamble. Calculating the appropriate level of risk for your investment strategy can be tricky. Diversifying your income streams is one way to strike a proper risk-reward balance.
2. Create additional income streams: One strategy that works well for many new investors is creating additional income streams. Setting aside money for saving or investing can be difficult with only one source of income. Examples of additional income sources include part-time employment, rental property income, website affiliate marketing, freelance work, or a side business.
3. Establish a six-month cash reserve: Setting aside enough money to cover your budgeted financial needs for six months serves two fundamental purposes. When investing or running your own business, there is always a possibility for unexpected expenses or opportunities. Having a cash reserve will provide the flexibility you may need. Second, knowing that you have money in the bank will allow you to take more risks comfortably. For most investors, six months’ worth of savings is sufficient. After meeting this savings goal, available capital should be invested to provide a higher rate of return than a bank savings account.
4. Implement your financial strategy early: When it comes to investing, time is your friend, but only as it relates to capital that is in play. Waiting is rarely a good strategy unless saving briefly to attain a required minimum investment. One common mistake new investors make is holding their investment funds in a savings account while they wait for a particular market to improve. As far as possible, your money should be working for you at all times. If one market is underperforming, invest in another opportunity.
5. Grow your portfolio incrementally: Risk management and portfolio diversification are sustained by a sound incremental growth strategy. Small diversified investments limit risk by spreading exposure over a wider risk surface. An incremental approach to financial growth provides an element of stability needed to support a long-term plan.
6. Diversify your portfolio: An investor’s most potent weapon to mitigate risk is diversification. Each type of investment asset carries with it a specific risk profile. To diversity your portfolio, you should spread your investment funds across various asset categories that historically trend in different directions. Losses or poor performance in one category will be offset by more robust assets in another.
7. Find a good mentor: The road to financial independence can be strewn with many pitfalls. One way to avoid many of the hazards is to solicit the guidance of a mentor. The practical experience of someone that has traveled a similar path can be invaluable. While your path will be unique, anything you can do to avoid mistakes will increase the likelihood and timeliness of your success.