When you consider investing as a way of increasing your overall wealth it is really important that you be honest with yourself and understand what kind of investor you really are. Broadly speaking there four different investing approaches and they are saving, investing, trading, and speculating. All of them have their pros and cons but if you understand yourself and what your investment goals are the better equipped you will be to choose the right investment style and approach.
Firstly be very honest with yourself. Write down on a piece of paper what stage of your life you are currently at. Are you just out of college, at the peak of your earning power, or in you pre-retirement years? Have you invested before and perhaps won big or lost a small fortune? Understanding your approach to risk is vital here insomuch as did you cry into your pillow at night following a huge loss or were you emotionless or as traders refer to being “in the zone”? Finally do you feel that you are a conservative investor or an aggressive one?
Next consider your current financial situation. A firm recommendation is to ensure that you have around six months gross salary saved. This is just common sense and will help free you from feeling that you are risking the entire family wealth in any one investment decision. Having that financial safety net will ensure that come what may you can pay the bills during periods of unemployment or illness. The following sections briefly describe the four investment approaches and how they might now map to your current financial situation and character.
The common definition of saving is to lay up money as the result of an economy drive or thrift. Basically it is putting your hard earned cash aside, normally in a savings account. It is the least risk-adverse method of investing. The capital is “normally” safe whilst interest is regularly added monthly or annually. Many savings accounts are tied to mortgage interest rates so when they are low so will the interest on your savings, and when the rates are high so the interest rates on your savings increase. It pays to shop around the various savings accounts available to get the best interest deals.
When you consider investing it means buying an asset that you intend to hold for the long term, normally years. These types of assets are subject to stock market conditions and will rise and fall. Obviously the secret is to hold onto the asset during a bull market and sell during a bear market. Traditionally people look to invest for the long term in real estate, stocks and shares, and precious metals.
Trading can be short term in nature. The term “day trading” became vogue with the advent of household internet connectivity and the dot com boom of the late 1990s. There are a myriad ways to trade short term using spread betting, for-ex, and stock and shares. Beware of the day trading gurus selling you systems: those that can’t trade teach!
Speculating is often referred to as financial gambling and is often associated with “trading” although speculators tend to hold their assets for a longer term than traders. Speculators will often use technical analysis to guess the move of stocks or futures and options looking for big movements in price.
Knowing what type of investor that you are can help map you to a particular investing approach. Remember to first secure that financial safety net and if in any doubt consult a qualified financial advisor.