How to invest safely? 6 golden rules to invest your savings
Who would not like to invest safely? Here are some simple rules for investing savings safely, turning risk into an ally.
Anyone who has dealt with investments will have to be directed by a consultant or employee to a given financial product, with a specific time horizon and, obviously, risk level. However, there are some fundamental rules, regardless of the type of investment chosen, which must be taken into account if you want to invest safely and informed way.
1) Investing savings in a conscious way: The value of information
Proper information before starting helps you understand and choose the most suitable investment. There are various financial instruments, time horizons and performance expectations. As well as different procedures, for the available capital and the strategies adopted.
For this to be possible there are some key elements, such as financial education, from which to start.
The global average financial culture has in fact tended to be little evolved and even the emerged from various studies, remains weak and completely inadequate.
The time that the investor devotes during the week to monitor their investments is scarce and often has little information about his bank account for which any improvement conditions are ignored.
Most of the time, the basic rules of financial investment are not even known, leading to potentially high risks or lack of profit opportunities.
Certainly investing your money without having understood the operation of the chosen financial product or the possible consequences, increases the probability of making mistakes and suffering substantial losses. Sometimes due to the difficulty in terminology, we often spend more time studying the potential purchase of an appliance compared to the study of an investment suited to their needs and efficient savings management.
A conscious information and financial knowledge, together with an eventual assistance from the operators of the sector, is one of the prerequisites for a correct and good investment, adapted to one’s own needs.
The first two “golden rules” of the famous investor, Warren Buffet, recall how essential it is:
- Do not lose money
- Remember that a proper loss management can be the basis of a successful investment.
2) Relying on experts: How to invest safely the savings by setting reasonable targets
In recent years, the number of investors seeking support and advice.
In fact, referring to an independent, clearly independent financial advisor, allows the saver to find the information necessary to understand how to invest the savings and face the market in a less risky manner. Finance requires a constant monitoring operation that is difficult to do, for the less experienced, independently. It is a delicate subject that implies knowledge of the tools, continuous updating on the state of the markets and, for those who decide to proceed independently, trading capacity.
For this reason, being supported in the investment activity is now more and more useful and convenient.
If one excludes the possibility of operating autonomously, two possible alternatives are envisaged: that of the financial adviser or that of the banker.
Although there is no ideal solution in this regard, we advise you to avoid situations in which the conflict of interest, however “masked” is present. Selling a product and also gaining indirectly from its success can affect the quality of the product itself.
On the other hand to operate in complete autonomy from institutions of various kinds, ensures transparency that added to professional competence, helps to choose the most suitable investment and meets their needs, precisely because not spoiled by interests of any kind.
3) Secure investing: Invest safely the savings away from excessive risks
Investing money always involves risks but a solution for a high return and a low risk, it exists and is expressed in the investment in a diversified portfolio, composed of different products and Asset Class.
The asset classes essentially represent what you decide to “bet on”, the investment class on which you decide to invest and among those in which most of the investments converge are:
- Raw material
- Monetary component
- Liquid assets
How to invest therefore? The returns linked to each of these Asset Classes differ and in general there are low or no returns if easy access to the money invested is required and the guarantee of having intact the capital invested. But a well-balanced investment portfolio allows for good performance while containing related risks.
For example, the investment in ETF is well matched with the needs of different investor profiles because it involves investing in a basket of securities and then:
- Diversify your investment (investing in different assets allows you to balance any losses in a stock with gains from another)
- Contain costs compared to other forms of investment (passive management reduces costs compared to active management)
- Contain risks (passive management requires a more prudent approach to the market, given the replication of an index, for example the Standard & Poor’s, and not in its overrun)
4) How to invest safely the savings over the long term
Remember the old fairy tale that since we were children forced us to think about the need to save for the future?
Given that apparently despite ourselves, the sacrifice is not lacking, the savings still remains one of the most widespread objectives and understand how to preserve its value and make it grow over time one of the main challenges.
Above all in this moment of uncertainty and instability, on a financial level, it emerges the tendency on the one hand to contain costs on current accounts and on the other to seek investment solutions for small amounts that can guarantee a modest gain in future years.
For example, a young person who wants to invest 10,000 dollars, knows he can count on a long-term horizon and for this reason it is advisable to invest in ETFs, which in the long term give the opportunity to increase the capital invested while containing costs and risks related to investment.
The usual rule is that the more the investment time horizon is close, the better the return will be. While with a savings target over the 5-year horizon, you could earn a substantial amount, keep up with rising prices and invest safely without incurring unsustainable levels of risk.
5) Safe investments: Prudently and starting from small amounts
If investing in a small amount such as 5000 dollars, will not allow you to live on income, literally speaking, certainly can represent an opportunity, useful to make money saved and not to frustrate the sacrifice made. In addition, even if you have a good economic availability, the ideal is always “to take a safe”, then investing starting from small figures and then fuel the investment over time.
To the question “How to invest safely a small sum”, various solutions such as the deposit account, the normal current account, the government bonds or, on the postal front for example, the postal savings account and savings bonds, will probably come to mind. But if the intention is to derive something, therefore that of investing and giving real value to the efforts made, the aforementioned hypotheses are to be discarded, even for investments of limited size.
The same goes for the State, which, in view of a more solid scenario, no longer offers investors notable returns. Moreover, even in the face of facilitated taxation, it is often more convenient to look for a higher return than to make a choice based on taxation.
This forces the saver to look for new products and new sources of return, moving his target from very conservative products to investment solutions aimed at longer time horizons.
So allocating the portion saved in different products and for a period of time maybe a few years, offers the possibility of being able to see interesting yields accrue and optimize the relative costs.
6) Cut management costs
The savings on investment costs have a direct and enormous impact on returns. Every dollar saved annually (and not spent on commissions) is kept as investment capital and reinvested (and therefore capable of generating additional returns). And clearly, the longer the investment time horizon, the greater the benefit of cost savings on the final return.
For example, in the investment product universe, the most efficient instruments for the construction of an investment portfolio are ETFs, which, thanks to their limited management fees, reduce the operating costs of an investment portfolio by up to one tenth. To more expensive tools (for example, consider our in-depth analysis of Individual Savings Plans).
Therefore, if we can allocate for a while, even a small sum of money (or even a larger one), the ideal is to invest safely in flexible products that can offset the erosion of running costs with a modest, just yield and really useful.
We are sure that, given the growing complexity of economic, political and therefore financial scenarios, in the coming years, advice on asset management will be increasingly relevant and necessary.
The geo-political tensions shatter apparent security making it increasingly difficult for a normal saver to understand how to invest safely.
But if on the one hand it is true that there are no safe investments because there is always a margin of risk and the landscape is complex, on the other it is true that following a series of simple but fundamental rules, there are ways to invest safely, responsibly and efficiently.
For this reason, being helped and keeping in mind our advice to invest safely from the beginning can already be a good starting point, a secure base in a context, that of markets, unstable by its very nature.