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How do I Make the Best Investment Decisions?

Mike Howells
Mike Howells

Most people invest money at some point in their lives, with the goal of putting the money to work and growing it through compounding interest and rising stock prices. Most types of investment are not guaranteed to have positive results however, and so it is incumbent on the investor to make the best investment decisions possible to ensure a net gain rather than a loss. Knowing your goal, educating yourself on various investment strategies, and keeping a diverse portfolio are all wise decisions when investing.

There are a multitude of aphorisms related to investing wisely. They are popular because they are generally true. One universal key to making wise investment decisions is to have an ultimate goal in mind from the start. Saving for college, for a house, for retirement, or even just for a computer or new oven all have different timeframes, and demand different investment strategies.

Man climbing a rope
Man climbing a rope

Longer term investment strategies can afford to be more aggressive, as the risk is balanced out over time. Short term plans must be more conservative because there is less time to make up any potential losses. One basic reality to understand is that making money from investing does not happen overnight. Patience is among the most important elements of investing for profit.

The type of goal will dictate the kinds of investments that should be made. Generally speaking, risk and reward go hand in hand with different types of investments. The higher the risk, the higher the potential reward, and vice versa.

Conservative investments include savings accounts, certificates of deposit (CDs), government bonds, and mutual funds. Such choices are good options for those starting to invest later in life, as they are intended to grow slowly but surely and, in some cases, are guaranteed against loss. Individual stocks, futures, and commodities are typically riskier sorts of investments. These have the potential to earn money more quickly, but stand to lose significant value as well.

Ensuring a diverse portfolio should be a guiding rule when making investment decisions. This means dividing the total money being invested between a variety of financial products, so as not to be overly dependent on the success of one product in particular. Keeping the overall goal and timeframe in mind, a portfolio should be weighted with more conservative or more aggressive products, but include some proportion of both.

Another tested aphorism warns against the hazards of day trading. Day trading is literally the buying and selling of stocks over very short periods of time, often within the space of a business day. Though romanticized in the media and pop culture, day trading for the vast majority of those who participate in it is not a great money-making endeavor. It requires a great deal of micromanagement and near-constant scrutiny of the financial markets. Among the array of wise investment decisions that exist, day trading ranks near the bottom and should be considered as much a hobby as a way to save for the future.

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