The subject of investing has become more popular as more and more workers gain access to investment markets. This is a result of the expansion of the middle class in industrialized nations who have enough income to pay for their lifestyle as well as discretionary income to invest in many different types of investment opportunities. However, we have lost sight of “Investing Prudently.”
Investing means to allocate money or valuables into production in an effort to make a profit—to risk so many dollars to get so many more dollars in return. So, when one loans money or owns an asset, he intends for more value to be created out of the commitment of funds for that purpose.
Prudence means to exercise care and protect from loss; to use discretion and intelligence in the management of assets. It does not always work this way.
A fundamental misunderstood concept in the subject is the difference between “INVESTMENT” and “SPECULATION.” While the term “investment” is all-encompassing, there is a difference in application. When one is investing money, his first priority is the safety of his principal and investment returns are a secondary consideration.
However, when one speculates, he is willing and able to accept a loss of principal, to a greater or lesser degree, in exchange for the potential of greater gains. All investments and speculations carry the risks of potential losses; the question is whether they are acceptable or not to the investor.
To illustrate this, a simple question can be asked: Has a loss in an investment ever caused you a negative emotional response? This is known in the industry as a “risk tolerance” question. If you answered yes, you most likely have engaged in speculation beyond your comfort level—or an intolerance for risk.
Below are the 5 simple rules of investing prudently:
RULE #1: The cardinal rule of investing is: DO NOT LOSE YOUR MONEY. Yet many people violate this rule by taking too much risk in the quest for high returns without considering the negative consequences if things don’t go as planned. Most of us tend to base our investment decisions on GREED and FEAR. These two emotions cause irrational decisions to be made in order to make a killing or avoid perceived further losses. Sophisticated investors understand and control these emotions.
RULE #2: One Always Invests In Another’s Character. When considering with whom to invest, always perform what is known as due diligence. This means to critically analyze the investment and it’s provider with a high degree of care to ensure that it is appropriate for you. All investments are in people. It is in their ability and competence that one places his faith—can they deliver what they promise? All too often errors in judging another’s character result in losses, whether with an individual or a company.
RULE #3: Do Not Put Your Money In Investments That You Do Not Understand. There are literally thousands and thousands of ways to invest your money to have it work for you. Every investment has its own inherent risks and rewards and they must be understood before you commit your money. Always do your research and ask questions until you are comfortable in your understanding of the investment opportunity. Otherwise, you may experience an unfavorable situation in the future.
RULE #4: Diversify Your Investments. Prudent investors do not concentrate their wealth in only one or a small number of different investment alternatives. They diversify into many different types of ventures in order to reduce the risks associated with having too much money in any one asset. The reason for this is simple—if one investment goes bad, then it will not destroy your overall financial plans. Take care to ensure that you are adequately diversified. Done properly, you will have a less volatile and uncertain investment experience.
RULE #5: The Most Prudent Investment Is In One’s Self. Investing money into those areas that can make you more productive and effective can provide the greatest lifetime returns. This includes proper education and training, excellent work tools, and care of the mind, body and environment. This investment is a priority!
Prudent investing is necessary on the route to financial prosperity.
You will find that following these 5 simple rules of investing prudently will assist you with a much more positive and successful financial experience while you Live Your Art®!