The Path of Financial Success: Step # 7

Invest and Diversify

Wow, It has been a while since my last post here. I am quite busy with life at the moment and I have another blog to manage. So, sorry for all of you who has been waiting for the 7th step to financial success here at Compound Savings Interest.

Diversifying means that you are spreading the risk in an investment. Because there is always some risk involved in every business and investment opportunity, it would be wise to spread your money so that you don't lose it all once the market begins to crumble. Prudence demands that, whenever possible, you should actually spread the risks. Remember there is no such thing as a perfect business and so many things can go wrong! So, make sure that the investments you make are properly matched with controlled risks.

Always remember this when you are evaluating business or investment opportunities. Investing is not simply looking for opportunities. Investing must always match a specific purpose! When you invest, you must know what you are doing. Your expectation of investment returns should be very clear as to the amount and time of income.

But investment is not only about the amount of income. You must also try to understand what an investment return, or yield is. A yield is the percentage return that an investment delivers based on the amount of principal you put in. It is usually calculated per year.

In every investment, you must evaluate it in terms of:

• Return/Yield - How much do I get from this investment? Is it enough for me? Does it beat inflation?
• Safety of Capital - How safe is this investment and how large is the risk of losing my capital? Is it worth it to have an investment of higher returns but with higher risk? Can I afford to lose my capital/
• Liquidity - How long will it have to be before I can take my money out if needed? Can I convert it to cash anytime I want?

Then ask yourself these next set of questions:

• Why am I interested in this investment? What is the specific goal that this investment will achieve?
• Will it bring me closer to my desired net worth and by how much closer?
• How much of my investible funds or present net work am I putting at risk with this type of investment?
• Do I have to decide now? Will this investment opportunity continue to be available tomorrow, next week, next month, next year?
• Is the financial return or income I stand to gain commensurate the risk I am taking with my money?
  

These are the questions you need to ask yourself in order to help you choose the proper investments and to know when to diversify. If you are about 50 years old. It would not be wise to put a majority of your money in stocks, but you should put it in bonds for safety. If you are young, you should put most of your money in stocks and less in bonds.

The percentage of your investment capital all depends on you. However, it is not wise to put 100% of your cash in stocks or 100% in bonds. It would be very wise to diversify. For example, you should place 70% of your money in stocks and 30% in bonds if you have a long way to go until retirement. This involves a much higher risk that putting 70% in bonds while 30% in stocks. But when you are still young, stocks normally beat the market and have higher gains on the long run.

What you diversify all depends on what your need is. Just don't take out your money every time there is a little twitch in the stock market since there would be an ugly tax on your capital. Just leave it be and trust in the power of compound interest!

Ok, I'm done with Step # 7. I hope you continue reading the articles here at Compound Savings Interest. Comment are very well appreciated!