Investing Simplified: Building Wealth One Step at a Time

1

Introduction

An all too common experience for individual investors with a substantial investment is one of significant confusion. Everyone has a 'hot tip', but the problem is that the 'tips' usually conflict. A study of some of the stocks recommended as a 'buy' and a comparison to the same analyst's 'sells' on other stocks might be enlightening. Even advice from industry professionals such as brokers can be conflicting. There are many reasons for this, but the simple fact is that successful investing is extremely difficult and complex for professionals, let alone amateurs. A simpler approach is more likely to work well.

Investing doesn't have to be complicated to be effective. Following simple and straightforward principles may significantly improve your success at investment. 'Investing Simplified' may help you achieve the elusive goal of meaningful returns on your investment. At the same time, it might help you to sleep better even in the midst of today's troubled times. You should be prepared to spend time on this. Many of the principles are simple, but you may need time to let them sink in. This may very well be the most important time you have ever spent, as measured by return on time invested.

2

Getting Started with Investing

Keep in mind that you do not want to take too much risk or too little risk, and you want to avoid investing in a level of risk that will cause you financial distress. Different types of investment can be split between different risk and return levels. The most effective investment strategy is to diversify your investment across different types of assets according to your risk and return. A practical understanding of risk, risk and return, and liquidity will also aid your selection of investments.

Liquidity: A liquid investment can be readily converted into cash with little loss of capital and it is normally associated with low levels of risk. High levels of liquidity usually involve an investment in cash or cash equivalent. At the other end of the scale, an investment in buildings or other fixed assets is low in liquidity because it takes time to sell the asset and the seller may have to accept a lower price in order to offload the asset. It is important to weigh up the liquidity of an investment against both the level of risk and the returns expected.

Risk tolerance: how much can you afford to lose? All investments involve taking on risk. It is helpful to think in terms of risk and return. Low levels of risk are associated with low potential returns but also low potential loss. Higher levels of risk are associated with high potential return but also high potential loss. Usually, the riskier an investment, the higher the potential returns but also the higher the potential losses.

Understand why you are investing. Before you start investing, it is important to understand why you are investing. Your purpose will determine how you approach investment as well as the level of risk that you take on. Different types of investment carry different levels of risk, return, and liquidity. Defining your risk tolerance and investment will determine which types of investment are more suitable for you.

2.1. Setting Financial Goals

Throughout this process, it is important to talk it over with your spouse or your financial partner. You need to be setting these goals together. Make sure you write down your goals. This will make them more concrete. Without a firm idea of what your goals are and when you will need to achieve them, it will be very difficult to determine how much risk you will need to take and how to choose the appropriate investments. Always keep in mind