The meaning behind ‘do your own research’ on investing
There is a famous saying in Ancient Greece uttered by the great philosopher Socrates — Know Thyself. In a nutshell, knowing your strengths and weaknesses and knowing what you want in life will make you a happy person. What I find is that this quote is not just limited to some general way of how to live your life, but also applies to investing as well: Know thyself as an investor
Let me explain.
When I was in 5th grade, I setup a stand to sell lemonade . At the end of the month, I had sold about 30 cups and made $10. Taking a closer look, the business was setup by my mom who ‘invested’ her time and money to do it. My mom was an ‘investor’ into my business. An investment, however, is not limited to a small scale family business. The world of investing has evolved so much over the last 2,000 years. From physical houses to digital NFTs, there is an unbelievable array of different things that we can put our money into. The issue is more about the trouble of choosing what to invest in.
Investors have an objective of earning a profit on top of the initial amount that they invest. So say you’re starting out as an investor. Before you start researching into WHAT you can invest into, you need to know what type of an investor you wish to be.
Here are the 4 points that you need to figure out for this:
When starting out as an investor, it is almost a 100% the case that you will not have a large sum of free cash that you can just invest. You may have debts you need to pay. You also have cash that needs to pay for your living expenses — eating out, rent, studying etc. The free cash is the remaining cash you have AFTER all your expenses and debts are taken out from your income (could be allowance as well).
The other side of the free cash is the free cash you are willing to lose. There is no 100% guarantee that what you are investing into will earn you the profit that you are satisfied with. No matter the case, there is always even a small risk that the investor will lose money. But just because something is risky does not mean it is up to chance. Investment is not gambling. The point is is that mentally you need to be ready to lose whatever money you have put into. This also pushes you to be smart and careful about what you invest in. At the same time, it is the easiest shortcut way to budget out how much money you are willing to invest — like when you’re buying something online and you know you can’t pay past a certain price point.
The way to classify the different things you can invest in is 1) how risky it is and 2) how much of a profit you can expect from it. Strangely, every investment consists of a tradeoff between these two factors.
If you have opened a bank account before, you will know that the bank compensates you with small payments when you keep your cash in the bank. These payments are determined by an interest rate that is set by the bank and the government. The risk here is almost non-existent in that the government and within the bank prevent the bank from failing. From a risk perspective, this bank savings investment is low-risk, but the return is close to zero because bank interest rates are almost zero. A bank deposit is what you call a low risk low return investment.
There are also high risk high return investment opportunities. An example of this is a small company listed not too long ago on the stock exchange. The return is high because the small company can grow, but the risk is also high because the small size of the company may face competition or management issues.
You need to know which investments you are comfortable with in terms of risk and reward…but there is also time to consider.
How long are you willing to wait for your investment?
‘Time is of the essence’ is an extremely relevant quote in investment because it beautifully summarizes the reality that you as an investor will face. You only have limited money and you only have one life to live to earn a profit on it. What one chooses to do with his or her own life is everybody’s individual choice. Some choose to hunger for riches in the short term because life is short. Others choose to be patient and let the seeds they sow grow. These diametrically opposed viewpoints of life both have ardent supporters. Whatever you support will determine your investment view on time horizon.
The question you have to ask yourself is, “how long am I willing to not touch the money that I have invested?” This question is not a rational yes or no question at all. It is a question of emotion that looks you directly into the eye when you see that your investments have lost a lot of value in the short term. Do you want to avoid such a short term risk? Or do you just brush off whatever negative thing comes to bite you in the short term? Your answer to the question will not only determine the type of investment opportunity that fits you. It also reveals the your degree of involvement as well.
The related questions to what your time horizon is is how active you wish to be with you investment. If you decide to pursue a short term horizon and minimize your risk, then this requires a lot more time on monitoring the performance of the thing that you put your money in. There is also the case where you decide on what to invest initially and then take a backseat for the longer time horizon that you have set. On the other hand, there may also be cases where you do not want to be active at all with your investments, and you hire and give the responsibility of handling your investments to somebody else. Whatever your viewpoints are on this will allow you to further drill down on which investments you wish to be involved in as different investments require different commitments of time and learning.
Know Thyself is not just a philosophical statement but an investor’s statement. It can be daunting to behold all the different things you can start investing into. Large cap stocks, midcap stocks, bonds, foreign exchanges, crypto, futures, commodities, cryptocurrency…the list goes on…and before you know it, you have gotten yourself a headache not knowing what to choose. But there are factors that help you scope out the investments that are a good fit for you. These 4 points that determine the type of an investor you wish to be:
Once you know your investor profile, you can now proceed to click here and explore what are the various things within the newest part of the investment universe of Cryptocurrency.
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