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7 Basic Things You Should Know Before You Begin Investing

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7 Basic Things You Should Know Before You Begin Investing

There are hundreds of lessons from successful investors about investing. Investing as a subject isn’t something you can master in school. You may know a lot about it, but experience teaches you a lot more. Here are some few tips you would want to know before investing your next dollar.

1. You Invest in People, not Substances.

Many people believe that when they buy shares of a company, real estate, currencies, commodities, mutual funds, and the likes, it is just those assets they have invested in. What you have actually invested in are the people behind the asset – their knowledge, skills, competence, risk appetite, vision, and other managerial abilities. It is these that turn your investment into profits or losses. Generally, a strong track-record of good performance is an indicator of good future performance.

Before you invest, find out about the competence of the people behind the management of the assets you’re investing in.

2. Risk is Inevitable

If you are trying to find risk-free investments, then you’re looking at sovereign securities such like government bonds and notes. Investments carry risks, and high earning investments are likely to carry high risks. This is why there are investment professionals who make sure you earn high returns on your investments whilst lowering or managing the high risks associated with such investments. Do not be afraid. Do not run away from risks if you want your investments to grow faster than what the market will return. Billionaires and millionaires made money by taking risks, not avoiding risks.

Risk is inevitable, manage it.

3. Start early

No matter how old you are now, it is not too late to start investing. However, starting early is advantageous than starting late. Rather than waiting to invest big sums when you are old and earning enough, you should start investing small amounts now, and through your lifetime. Gradual investments over long periods yield enormous wealth in the end.

4. Income size doesn’t matter

The size of your income doesn’t matter so much in investment. It may limit the kind of assets and businesses you can invest in, but you may find equally good opportunities with small amounts. Even if you earn less than GHc1000 (about $250) a month, the key is to develop a habit of investing regularly a portion of your income.

What matters is gradual accumulation of wealth

5.Invest before you consume

Make it a habit of investing part of your income first, and consuming the rest. The regular practice for many Ghanaians and Africans is to spend first, and invest the remainder, if there is any. Such a habit usually leaves you with nothing to invest at the end of the month, since human wants are endless.

6. Diversify

Don’t make it a habit of investing in one thing for the rest of your life, just because it’s your passion. Musicians don’t only invest in their music and the music of others. Footballers are not only investing in themselves and other footballers. Real estate developers have other investments. One of the ways of lowering your risk is diversifying – including different assets in the basket to balance your portfolio.

The growth of the internet, for instance, has taught many businesses this basic lesson of looking at other emerging opportunities and disruptive ideas or products and constructing their portfolios accordingly. I spoke with a young fashion entrepreneur who revealed to me that he has also invested in a barbering salon, just within 18months of making some decent revenue from making and selling urban African clothing. That’s the whole idea of diversifying your portfolio.

7. You must beat the market, always

You may not be able to perform better than the market always. Even sophisticated investors are not able to do that all the time. We have seen banks and other big businesses in Ghana, Nigeria and other parts of Africa return less than the market and in some cases, less than risk-free rates in their respective economies. It is not an easy task.

But your work is to make it your goal. Always identify the 1 year risk free rate at the beginning of the year and make it a goal to at least beat it by some 4 or 5 percentage points. Track and compare your performance with other major market indices like the GSE All share index or even industry averages. If the returns you make on your investments are always higher than the market, then you grow your wealth faster.

I wish you all the best and would like to hear from you how your investments are doing. Comment and share this post.

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