What do we need to know before investing?

If you are thinking about investing money for the potential returns it offers, you should know that it may go well, but that there are always risks. That’s why we are going to give you some basic tips to bear in mind before making any investment decision.

How much money are you going to invest?

First of all, you need to decide how much money you want to put towards your financial investments.

The markets are subject to change

The financial markets are constantly fluctuating. The term volatility is the most commonused term to describe and measure the uncertainty provided by changes to theprices of financial assets.

Additionally, there are times in the market when the prices are more pronounced and every now and then there are crisis periods and asset prices fall dramatically. 

Investing in financial markets means that we have to assume that our investments will always be subject to these types of fluctuations. If you are going to invest in the financial markets the money that you invest must be money that you will not need during the investment term.

That’s why, investing in order to obtain short term gains is inevitably associated with high risk. Furthermore, the larger our intended gains, the larger the associated risk. Always bear in mind that the greater the expected returns, the greater the assumed risk. Once again, be sure that you do not need the money that you are going to invest, as it may have losses.

The opposite can be said of long term investments, where the capacity to wait and overcome falls in the market means that you can assume more risk with your investments. With a long term vision you will avoid having to experience any possible losses with your investment period  due to any eventual liquidity needs. 

How much risk are you willing to take on?

Before investing it is important to know the risk you can assume. Every investor has their own risk tolerance level that they need to be aware of. Risks and returns go hand in hand, because for more returns you also need to take on more risk, and vice versa.

It is also good to know that just as with normal  market conditions, those assets with a higher risk tend to suffer more fluctuations with their prices than those assets with less risk.

Therefore, in general terms:

When the forecasts for the financial markets are favourable and the market goes up, those assets with higher expected returns generally perform excellently.

Whenever the financial markets are going through uncertain times, those assets with higher expected returns, and therefore more risk, tend to perform worse.

You must start from a strong financial position

To invest you need to be at a point where your accounts are well under control, including your debts. We do not mean to say that if you have any outstanding credit you cannot invest, but it is essential that everything is in order and that you are in a situation where you can fulfil your financial obligations.

On the other hand, to build long term wealth, it is important that you assign part of your income to your savings, meaning that you have to invest with the money left over after making your payments while also saving part of what you earn.

It is important to keep a composed outlook

Now we know that investing bears its own risks and that the market is subject to change, it is essential to be composed when investing. When investing it is important to think positively, as if you don’t really believe that things will work out, why invest?

It is one thing to be cautious, and to know how much money to invest and what level of risk tolerance to assume, and another to think negatively each time there is a drop in the market. In reality, investing is a combination of caution and composure.

Diversification is the key to success

Somebody with less investment experience may make the mistake of putting all of their investment budget into just one thing. However, it is much better to have diverse investments, as while some investments may not quite work out as you would have liked them to, some do even better.

Losses are normal, and so are returns

We previously said that when investing it is important to stay calm, and that is true. In this regard, you also have to bear in mind that it is normal for some investments in your portfolio to not perform as well as you had expected.

We cannot predict the behaviour of the financial markets or of certain assets. We can also unexpectedly find ourselves with some assets that don’t perform as well as we had hoped. That is why we recommend, in addition to not risking more than you can invest, to diversify your investments well.

We have already said that investment involves risk, which is why it is good to know that if you are willing to invest, you are also willing to take on risks. If you are prepared to take on this risk, you can be successful in your investments.

José Luís Álvarez – CEO HollyMontt

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