Investing is not a secret knowledge that only a few can possess. However, in order to get down to it, you need to absorb some basic information. After all, the whole art of saving and investing money is to make the value of savings grow faster than inflation, i.e. not only to have more money, but also to buy more with it.
We invest financial surpluses
First of all, you need to have something to invest, so you need to put your household budget in order. The calculation should take into account not only the fees for bills, food, clothes, foreign language lessons, entertainment, but also potential larger purchases, e.g. holidays, bicycles, and the fact that you suddenly have to buy a washing machine because the old one has broken down. However, when organizing the household budget and the willingness to invest, the most important thing is to avoid dangerous situations in the future when you lose financial liquidity. You cannot make yourself incur debt to pay your bills because you have invested your living money in the stock market. Withdrawing from investments in order to cover a hole in the household budget often ends in a loss. That is why we invest only financial surpluses, i.e. money that we do not need to cover current needs.
Long-term investing
Money invested in the long run allows you to achieve the highest profits. With long-term investments, you risk less. The market is characterized by business cycles (bull market – growth, bear market – decline) and short-term prices of shares, real estate, gold, wine change very quickly. In the long run, you can achieve a higher rate of return by “participating” in several business cycles, from extreme undervaluation to extreme overvaluation. The more cycles you have during your investment, the greater your chances of achieving profits (in a few years, the value of the companies in which you have shares should grow, and thus the amount of your money). Assessing whether a given stock is cheap or expensive at a given moment is never easy, so a period of five years seems to be enough to invest money with a profit.
Systematic saving
It is often difficult to clearly determine at the time of making an investment whether it is a bull market or a bear market. Therefore, to minimize losses, you should not make a purchase at one time, but do it in stages. It is worth investing the same amount every month. Why? Because this way you will hit both a bull market and a bear market – sometimes you will buy high, and sometimes cheap (however, as some people emphasize, it is not worth falling in love with your shares and it is worth setting a ceiling below/above which we will sell/buy a given share). If, for example, you invest PLN 200 in a selected company every month and the price of one share is PLN 10, you will buy 20 shares in a given month. If the price drops to PLN 5, you will buy 40 shares for the same money. On the other hand, after the share price increases to PLN 20, you will be able to buy only 10 shares in a given month.
Planning and Goal
To start your adventure with investing, you must determine the purpose for which you decided to multiply it. Why? Because saving the same amount of money every month certainly requires a lot of perseverance, and only the prospect of achieving something specific in return can motivate you properly. Determine what you’re investing for and how much money you need to do so, then tailor your investment plan (m.in., how much money you need to set aside each month) to suit your goal. In the calculations, take into account the degree of return on investment, inflation, as well as the tax on capital investments. You can do it yourself or use ready-made financial calculators on the Internet.
Diversification of the investment portfolio
There are no assets that will guarantee you profits in the long term. If that were the case, then everyone would now be busy investing their financial surpluses, and in the future they would be spending their holidays in the Balearic Islands. Unfortunately, the world of finance does not look so rosy. Therefore, since we cannot predict the future, we should buy a little bit of everything. From bank deposits, bonds, to stocks, works of art, etc. Then we have a higher probability of profit – if one of them brings losses, there is a chance that other components of the investment portfolio will bring profits.
We buy in a bear market. Do we sell during a bull market? Let’s not believe in this myth.
This is a myth. Despite many economic data, it is difficult to predict whether we are at a low or a high when buying shares. A good example is the recent crisis, during which more and more people (especially in Poland) invested at the very top. The same is true of Spain, where everyone bought properties almost to the very end, the prices of which fell sharply during the crisis. Real estate has lost up to 50 per cent of its value, prices have not rebounded so far and it is difficult to predict when and if this will happen.
Assess the risks you can take
Bank deposits are safer (the interest rate is linked to the inflation rate – deposits are based on WIBOR 3M or WIBOR 6M, i.e. the amount at which banks lend money to each other) and Treasury bonds. Those based on higher risk, such as shares, already require some knowledge that you simply have to learn. Even if you want to commission a financial advisor or invest with mutual funds, it is worth knowing where and where your money is going. You can also invest in durable goods. It is commonly believed that what cannot be easily multiplied: land, real estate, gold, silver does not lose its value. But as with everything, you need to know how to know if the prices are not overestimated at a given moment.
If you want to make a profit, you have to assume that you can also lose. Without taking the risk, you should not invest to avoid disappointment. However, if you are not ready to risk losing your savings, you can always choose safer forms of investing money – bonds and deposits. You may not earn much, but you have a chance to maintain the purchasing power of your money, i.e. in a few years you will be able to buy as much goods as you do now. However, if you want to make money, you also have to take a risk. Many people can’t decide on it. Therefore, demo games devoted to investments are not adequate to the real possibilities. It is easier to risk with virtual money than with your own.
Invest in what you understand or know
You can now invest in virtually everything from real estate, gold, company shares to wine, works of art, or even coffee cultivation. Which option to choose? Safest is what you know best. If you work in the construction industry, you know best whether it is in a period of prosperity or stagnation. If you do not know the principles of the stock exchange, initially choose what you understand well, e.g. buying bonds or bank deposits. Investing in something you don’t know about is the shortest way to lose your capital and become discouraged from the market for years to come. Before you learn the right mechanisms, set up a deposit or buy Treasury bonds and learn economic indicators that will help you make sensible investment decisions.
The snowball effect, or believe in the power of compound interest
This means that in each subsequent saving period, interest is calculated on the initial amount along with the interest that has been accrued. So, for example, every six months interest is calculated on a higher and higher amount. In this way, savings multiply faster and faster. Therefore, it is worth setting aside even small amounts of money systematically. This is a strong argument for long-term saving, but keep in mind inflation, which can eat away at some of your savings.
Consistency in action, i.e. don’t panic and act according to plan
If you assumed at the beginning that you were systematically building your investment portfolio, do not be guided by the prevailing mood on the stock market. If everyone suddenly sells stocks, don’t panic and follow the path you have set. Similarly, the other way around, stocks start growing rapidly, then don’t drop everything to buy them. Remember, if they gain today, they may as well lose value tomorrow. Many people made this mistake in 2009. Previous prosperity on the market encouraged inexperienced investors to buy shares, which they later began to sell in panic, losing up to 50 percent. By violating this principle, you can make money once or twice, but in the long run you will definitely lose.