Volker Hartzsch is a serial investor with a long history of multiplying investments, having invested in more than 23 start-ups to date. This article will look at investing from the beginner’s perspective, providing an overview of some of the most important considerations.
Investing can be an effective means of building long-term wealth. Nevertheless, selecting the right investment can be a bewildering process given the breadth of choice available.
Creating an investment strategy is crucial for any investor, helping them to assess their investment goals and the steps necessary to achieve them. Committing a plan to paper establishes a framework for their investment activities, reducing the likelihood of emotions influencing their choices. When the investor’s portfolio is performing poorly, it may be tempting to change their investment strategy. However, knee-jerk reactions based on short-term market fluctuations could be detrimental to the outcome.
Investors need to consider their risk tolerance and investment timeframe. An investment plan for an older individual is likely to look very different from that of a college leaver, as someone who is older has less time left to start over should they lose their money and is therefore likely to favour a low-risk approach.
Before committing money, it is important for beginner investors to carry out comprehensive research by reading books or taking an investment course covering modern financial ideas. While an individual need not be a financial expert in order to become a successful investor, careful research and knowledge building can go a long way in terms of reducing risk. Individuals who came up with theories on diversification, market efficiency and portfolio optimisation received their Nobel prizes for good reason. Investment is a combination of art and science, and the scientific aspect should not be ignored. Once the beginner investor knows what works in the markets, they can set their own rules. Take for example Warren Buffet, whose ethos ‘Never invest in a business you cannot understand’ served him well. Although he may have missed out on the tech upturn, he also avoided the devastating downturn when the tech bubble burst in 2000.
Investing is a long-term wealth-building strategy that usually involves committing funds for at least five years. The longer the individual leaves their money invested, the more time it has to grow and recover from any dips in the market.
Risk and reward go hand in hand, with higher potential rewards on offer for those willing to accept a higher degree of risk. However, investors have to decide their own risk tolerance based on a combination of factors, chief among them their timeframe and investment goals. Diversification is an effective means of reducing risk by spreading money across multiple investments, lessening the impact should one perform poorly.