August 9, 2021
10 Investment Ideas That Are Proven to Change Your Life
Investing your hard-earned money can be difficult to do successfully, but there are tried and true strategies that tilt the odds in your favor. These 10 proven investment ideas are easy to implement and have excellent track records of success.
1. Assess Your Tolerance for Risk
Investing, by definition, is risky. The trick is to find opportunities that offer unlimited upside potential with minimal downside exposure, but everybody else is trying to find these opportunities too. Thus, you need to understand what kind of risk level that you’re willing to live with.
Will you still sleep well at night knowing that the value of your portfolio can drop 10% next week, or are you willing to sacrifice some potential returns for more stability? The choice is yours, but the most important thing is to make this decision before you get in the game.
2. Define Your Time Horizon
If you’re investing for the long haul, then focusing on instruments like short-dated options wouldn’t be a great idea. On the other hand, some people prefer time horizons for the order of months. There are hundreds of ways to deploy your capital in today’s financial markets, but you need to determine how long you’re willing to hold an investment and ride the market’s volatility.
3. Rebalance Your Portfolio Regularly
Market trends come and go, so it’s easy to end up with your portfolio over concentrated in one area. For example, let’s say you invest in three stocks. If one of these stocks quadruples in value while the other two stay flat, then you now have over 80% of your investment capital sitting in the highest valued stock. Trimming your largest holdings periodically to rebalance can help you avoid unnecessary risk.
4. Harness the Power of Compound Growth
Our brains naturally assume the world is linear, so understanding exponential growth can be tricky. An easy way to wrap your mind around the phenomena is to apply “The Rule of 72” to a single dollar. This rule states that the time for one dollar to turn into two dollars is the rate of growth divided by 72. For example, a compound growth rate of 10% doubles your money approximately once every 7.2 years.
5. Consider Dollar-Cost Averaging
Many of the world’s most successful investors, including Warren Buffet, recommend investing equal dollar amounts over time. If you have $5,000 to invest, for example, then you can buy $1,000 of a given stock every month for five months instead of investing all $5,000 at once. When you use the dollar-cost-averaging strategy, you don’t need to worry about trying to time market moves.
6. Only Invest in Assets That You Understand
Violating this rule has been the downfall of financial professionals and amateur investors alike. Instead of paying attention to “what’s hot” right now, look for assets in areas or industries that you have personal experience with. You’ll cut down on hours of research time, and you’ll have a better idea about the potential risks you’re dealing with.
7. Stick to Your Plan
It’s easy to find yourself chasing a new fad, but you’ll have better long-term results if you can stay disciplined about executing an investment plan that suits your personality and life situation. If your plan is to optimize your portfolio for interest or dividend income, then there’s no reason to pour money into growth stocks or to speculate on commodities. After you define your objectives, be relentless about cutting out ideas that don’t fit your strategy.
8. Be Responsible With Your Personal Finances
The last thing you want to do is to put yourself in a situation where you need to dip into your portfolio to cover your personal expenses. Despite what Wall Street and Hollywood would like you to believe, the best investors are usually excellent savers. In fact, you can often find some extra money to invest by just cutting out unnecessary purchases.
9. Take Your Time in Making Decisions
New investment opportunities become available every day, so don’t feel like you have to get in on “the next big thing” at all costs. It takes patience, discipline, and a sound frame of mind to objectively evaluate an investment’s potential. Do as much due diligence as you need to in order to be completely comfortable with your decision.
10. Make Sure You Understand Liquidity
It can be a lot easier to get into an investment than it can be to get out. The ease with which you can convert an asset into cash is known as liquidity, and some investments are far more liquid than others. A commercial real estate property, for example, is less liquid than a share of Microsoft. Understanding an asset’s liquidity profile can help you avoid getting trapped if the market moves against you.