Understand Why You Invest Before You Invest
There should always be a goal, or objective attached to an investment. But not all investments require them to have the same goal. Here’s a list of some objectives, and how they’re different.
- Capital Preservation – To seek maximum stability for our investment by investing in assets that are associated with extremely low risk. For example, I usually have a couple thousand of dollars on hand.
- Hedging – To take long or short positions of an asset in order to hedge or offset the risk of another asset. For example, I hold gold and silver to hedge against inflation, which is gradual devaluation of currency.
- Income – To generate dividend, interest, RoC, or other types of income instead of capital appreciation. The peer to peer lending platform, Lending Loop, is a good example of this. My effective annual yield on the platform is currently over 10%. 🙂
- Growth – To increase the principal value of our investments over time through capital appreciation. Investors can expect attractive long term gains but also assume relatively higher levels of risk. My farmland and growth stocks such as Amazon, Netflix, and Facebook, are all examples of this objective.
- Speculation – To greatly increase the principal value of our investments by taking on substantially high levels of risks. Examples of this would be trading cryptocurrencies, or penny stocks.
Some investments could fit into multiple objectives. And much like anything else with personal finance, our investment objectives can change over time. But the important thing is to be mindful about what we want our money to do, and re-evaluate those objectives periodically (ie: annually,) based on our changing financial situations.
At this time my primary objective is growth. Most of my financial decisions are based on this objective. 😀 I’m willing to overlook short term gains in favor of maximizing the potential for long term total returns. Much of my choices, such as using leverage, makes sense when viewed in this context. But having said that, it wouldn’t be wise to rely 100% on a single investment objective. 😉 This is why about 20% of my net worth is allocated to investments that strictly produce income. Naturally over time, in preparation for retirement, my investments will focus more on income and capital preservation, and less on growth and speculation. 🙂
Whatever our investment objectives may be, the important thing is to make a decision. 🙂 As fund manager Sir John Templeton once said, “the only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future. The investor who says, “This time is different,” when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing. The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.”
Random Useless Fact: