Many investors invest their money in order to accumulate wealth over time. Investing in stocks, bonds, shares and mutual funds, among other things, is a great way to earn a significant return on investment (ROI). However, every investment carries a certain risk. If you want to ensure good profits from your investments, it’s important to understand how each investment works in order to avoid common mistakes and monetary pitfalls.
The key to effective investments is to know how to minimize and mitigate the risks while managing your money efficiently in the process. There are all kinds of information that can help you make the right moves or implement the right strategies, but the truth is that you learn as you go. That being said, here are a few investment tips to help improve your investing results.
Determine your needs
As mentioned before, the entire purpose of investments is to accumulate wealth over time and earn an ROI. However, you have to determine your needs beforehand in order to opt for the right kind of investment. For instance, how fast you want it to yield results is crucial for deciding the investment type. There are three types of investment for you to choose from: short-term, mid-term and long-term investments. Each investment type has its own unique advantages and disadvantages and you must familiarize yourself with each one before you make a decision.
As an example, short-term investments carry the least amount of risk but they also carry the least amount of profits, while long-term investments are riskier but they can yield a considerable ROI in the end. Consider this scenario; if you invest in stocks that yield profits over time, such as dividend income, you can maximize your ROI through a compound interest in 50 years. Also, if you place your investment income into a retirement fund, such as Traditional or Roth IRA, you’ll even get tax benefits to your incomes.
Research potential investments
The key to successful investing is to know where to invest in the first place. Buying stocks means buying a percentage of a company and all of its assets. The value of those stocks depends on that company’s performance in the market. In other words, you have to be able to assess the company whose stocks you’re planning to invest in. Of course, that performance may vary year to year but a good investor knows when to buy and when to sell their stocks.
Take small businesses for instance. Their stocks may not be worth as much as corporate ones but they have the potential for long-term success. As a matter of fact, after the “Tax Cuts and Jobs Act” has been signed in the United States, small cap stocks became a profitable investment. The main reason is that this tax reform reduced the tax rate of small companies from 32% to 21%, making them more profitable in the long run.
Diversify your portfolio
One of the most important factors in successful investing is diversification. Diversifying an investment portfolio means having various investments in place, such as stocks bonds and so on. Diversity helps reduce investment risks that are constant and also helps you ensure that you do not lose your entire investment on a single deal. In other words, you allocate your investment funds to various investments instead of opting for a single one.
For example, if you invest in a bond that goes sideways, you can still recover your losses from your stock investments. Another example is buying gold to protect your investments from global instability and inflation. Nevertheless, the point is to have a few alternative investments in place in order to ensure your investments will indeed be successful and that you’ll be able to drive good investing results.
Be mindful of taxes and inflation
Accumulating wealth comes down to how much money you have at the end of the day. Taxes and inflation play a vital role in how much money you’ll have after your investment deals and whether or not you’ve made any profits. The inflation rate determines the purchasing power and the true value of money. If you compare a $100 back in the ’60s and a $100 today, you’ll see that they do not have the same value. In short, the value of money decreases over time, which can greatly impact your long-term ROI.
That’s why investors oftentimes invest in alternative investments, such as precious metals, antiques and other as a hedge against inflation. As for the taxes, you can easily end up with less money than you had with your initial investments, even if you earned a 12% gain, for example. It comes down to taxes and investment types. Here’s an example, short-term gains on investments are oftentimes taxed at a personal income rate. When you add state and federal tax rates you may end up paying over 50% on taxes alone. In comparison, a long-term gain from an investment that lasts a year or longer is taxed between 0% and 23.6% on a federal level.
Investing in stocks has always been a good method to maximize your profits. However, as convenient as the stock market is, it’s not simple in any way. The key to driving good investing results lies in understanding the market, as well as in understanding the risks that are involved.
