Getting to know how to manage your money and build an investment portfolio can be a difficult task for many new investors. For some people, it’s simply a matter of not having time to give proper attention to the way their wealth is invested and the risks to which they’re exposing their hard-earned savings. For others, it comes down to a lack of interest in investing, finance, and money management. These folks might be smart, hardworking and even brilliant in other areas of life, but they prefer to do anything else rather than talk about putting money into a venture.
Avoid Investing in Anything You Don’t Understand
Don’t let anyone convince you into an investment venture you don’t fully understand or have interest in. It’s your money. You have the power to say no, plenty of opportunities will come along in life. Don’t let fear of missing out cause you to do foolish things. If you or the person managing your money can’t describe the underlying thesis of an investment; where and how the cash is generated, how much you’re paying for that stream of cash, and how that cash will ultimately find its way back into your pocket; then you aren’t investing. You’re speculating. It may work out in your favor, but it’s a dangerous game that is best foregone or, at the very least, restricted to a small, isolated portion of your resources.
Learn to Think in Terms of Net Present Value
From your perspective as an investor, it’s net present purchasing power that matters. Money is a tool, Remembering this can help you avoid the mistake that many men, women and families make, sacrificing their true long-term desires for their short-term wants.
Pay Attention to Costs
Make sure you’re weighing the value of what you’re receiving against the costs.
Never Think About Performance Alone Without Factoring in Risk Exposure
It’s a dangerous sign when investors start talking about their “great” returns without discussing how those returns were generated. The risk exposure to which you exposed your capital, measured not by volatility in market quotation but in the price paid relative to intrinsic value with an adjustment for the potential of wipeout, is the real secret of building wealth over the long term.
Pay for your investments in full and with cash
Avoid securities issued in certain sectors, industries or lines of business, particularly if they are further down the capital structure.