8 IMPORTANT FACTS ABOUT INVESTING THAT PEOPLE OFTEN FORGET

Posted by Fitz Villafuerte under Investing on May 25, 2016

These days, learning about personal finance and investment is as easy as searching online.

However, this is a double-edged sword because while information has become more accessible, not everything you’ll read on the Internet will be true or helpful.

I’ve seen websites with misleading data, people telling false stories, and the worst of them all — investment scams being shamelessly promoted online.

So how do you sort out the good from the bad? I believe it is by remembering these eight important facts about investing, and allowing them to guide you in every investing decision that you make.

1. Protection comes before investing.

All investments carry a level of risk. Most people try to avoid the risk by going for products with guaranteed returns, which more often are scams. Or they put their money in low-risk investments, and just accept the low returns.

The best way to manage investment risks is to financially protect yourself when things go south. Those who invested in the stock market in the past two years know too well that “parties” don’t last forever.

Your best tools for protection are an emergency fund, health insurance, multiple streams of income, and for the worst case scenario that you die, life insurance.

2. You need to have a financial goal.Investments are like modes of transportation — a bicycle, a car, a bus, a plane, etc. — what you take depends on where you’re going. This means your financial goals will dictate where you should invest.

A lot of people invest in what’s hot and trendy. They look at the news and see that the stock market is up, so they think that’s where they should put their money and forget to ask themselves if it’s really what they need to reach their goals.A friend has P200,000 that he plans to use for his wedding next year. Putting that money in the stock market is like riding a helicopter to go to a nearby mall. It’s fast and exciting, but risky. I’d rather take a car or ride a bike, or in the case of my friend, I advised him to put the money in a time deposit or a low-risk fund instead.

3. Interest rates on bank cash deposits will never beat inflation.

I’ve met people who don’t like to risk losing money so they just put their savings in the bank. Some of them are even proud of the millions they have in their time deposits.

What they don’t know is that because of inflation, they’re actually losing money by not investing. The Philippines’ average inflation rate is 5% (2000-2012), so if your time deposit is earning 4% pa, then your money is losing 1% of its value every year.

Putting your money in moderate and high-risk investments is the only way to beat inflation over the long-term. Don’t play it safe with bank cash deposits because it’s actually a sure way to lose money.

4. You cannot just copy how other people invest.

Investing is a personal task. People invest for different reasons. My financial goals are not the same as yours, which means you cannot just invest where I invest.

The best investment for you depends not only on your goals, but also on your financial capabilities, your risk tolerance, and your investment personality, among other things.

So the next time you read or someone tells you about a great investment — ask yourself first how that investment fits and complements your personal financial plan before putting money into it.

5. Constant cashflow is your investment foundation.

There are hundreds of investments out there and people waste a lot of time comparing and choosing which among those investments will give them the best returns.

My advise has always been to invest where it is convenient for them so they can go back and focus on making more money. Take advantage of your productive years and do everything you can to increase your cashflow.

That’s the reason why I spend most of my time building multiple sources of income rather than studying which investment is the best. When I have more money, I don’t have to choose at all because I can invest in all of them.

6. Your portfolio’s growth is more important than the performance of your individual investments.

Diversification is a common advise given by financial experts, but what does it really mean?

Most people simply understand this as making sure that you put your money in different types of investments. While correct, it is short-sighted because what you actually want is a robust portfolio that grows in value every year.

Your goal is not to choose investments that never go down. Rather, your goal is to create a portfolio that increases in net value year after year even if some of your individual investments go down.

7. In investing, time is more important than timing.

A lot of people like timing the market. They try to predict its behavior so they can buy low and sell high — but not only is this time consuming, it’s also easily frustrating.

Interestingly, while financial analysts don’t always agree when the market will go up or down, most of them however will agree that the longer you are in the market, the better it is for your investment.

Again, I’d rather focus on making more money than spending most of my time speculating and being a fortune teller. I put my money in stable investments with long-term growth outlook and let it grow over time — it’s less stressful.

8. Never invest in something that you don’t understand.

There’s a lot of misinformation out there when it comes to personal finance — most of them feeding on the fear or the greed of a person just to convince them to put their hard-earned money into their investment.

I’ve seen too many people getting fooled into investing on something just after being presented with some made-up statistics and fake testimonials. It’s unbelievable how these sneaky marketing strategies still work.

But you should be wiser now. Remember that ignorance is expensive, that’s why knowledge is and will always be the best investment. Learn more, keep learning — learn for life — and you’ll never be poor.