Although our portal mainly focuses on cryptocurrency, “investing” covers a broader spectrum. That is precisely why we dedicated today’s article to global investing and how to invest your money wisely.
Many people, fearing risk, choose to keep their savings in a checking account or at home. Although this may seem like a safe strategy, our times have unfortunately shown that it is not. Inflation is increasingly a topic at the global economic level, and it gradually and consistently leads to rising prices of goods and services. Simply holding onto cash does not generate returns; on the contrary, it stagnates and loses value.
Even in the Talmud, an ancient collection of Jewish laws, wisdom, and rules, investing and its importance were discussed. One sentence from this book can still be taken to indicate how crucial investing and asset diversification are: “A man should divide his wealth: a third in land, a third in goods, a third in cash.“
Of course, this statement can be expanded today. Investing encompasses a much broader range than goods and land as it did in the past. Investing is no longer a luxury reserved for the “big players” on Wall Street. Nowadays, every financially literate individual can invest their money in funds, bonds, cryptocurrencies, real estate, and much more.
In the next part of the text, we will provide basic information about investing in a global context. At the same time, upcoming articles will focus on a more detailed analysis of key segments in this field.
How to Start Investing?
At the very beginning, it is essential to determine what you want to achieve through investing. Furthermore, the amount you would be satisfied with. The figure you set at the start should be your ultimate goal. Less experienced investors often lose focus and get carried away by current circumstances. They think they can reach millions with small investments because the current global economic conditions and stock market environment are favorable and “bullish.”
Additionally, it is crucial to consider your risk tolerance. Every type of investment carries different potential rewards and an increased risk of failure. For beginners, investing in stocks of the top 10 companies or the NASDAQ-100 index (which includes the 100 largest companies trading on the NASDAQ stock exchange) can be a good starting point. Recently, buying real estate has proven to be the least risky option, given that prices are consistently rising. On the other hand, investing in cryptocurrencies is the most dangerous.
The next important segment when it comes to investing is choosing the right broker. Of course, while investing in real estate or collectible items like watches does not require much intermediation, trading stocks and securities requires a broker. Brokers enable you to buy and sell financial instruments. Since they serve as the link between you and your assets, it is clear that you should seek out the highest quality ones. Naturally, the crucial parameters you must pay attention to are fees, available options, and the quality of customer support.
Basic Rules of Investing
Investing involves putting money into various financial instruments. However, it is crucial to understand that no one can guarantee a profit, no matter how favorable the market situation may seem. Let us recall, for example, the period of the COVID-19 pandemic. COVID-19 drastically shook the global economy, leading many companies to collapse and investors to significant losses. Because there are no guarantees in the world of investing, in this text, we will present a few key rules that will help you increase your chances of making a profit while also reducing the risk of potential failures.
The first rule we will address is diversification. An example of diversification is best illustrated by the “50/30/20 Principle.” We believe the next chapter will clarify what we are referring to.
Another key rule concerns the duration of your investments, whether short-term, medium-term, or long-term. For example, if you believed in Bitcoin’s potential ten years ago and were willing to wait, your patience could have paid off many times. On the other hand, access to information is also one of the most essential factors in investing.
Finally, we will highlight one rule: Never invest more money than you are initially prepared to lose. People’s incomes differ, and everyone must decide how much they will invest. Of course, the type of investment also dictates the size of the investment. Historically, long-term investing has proven to be the most profitable since chasing quick profits often leads to losses. For this reason, we recommend avoiding “fast flip” trading and excessive trading.
Basic Principles of Investing
Investing is often considered a science, and many economic experts and researchers have dedicated their studies to helping people create financial freedom. It is possible to make informed decisions with long-term benefits through careful understanding of the market, economic laws, and investing principles. Now, we will present several globally recognized investing principles. These cover the stock market and offer strategies for managing your monthly budget effectively.
These principles are helpful for those who want to invest in the market. Also, for those who wish to manage their everyday finances more effectively. Additionally, these strategies include helpful tips. These suggestions will certainly assist you in finishing the month with a surplus in your wallet.
Pareto Principle
The Pareto Principle is one of the oldest principles related to economics and many other areas of life. It states that 80% of results come from 20% of efforts. It originated in 1896, when Italian economist Vilfredo Pareto noticed that 80% of Italy’s wealth was owned by 20% of the population. As the 80/20 theory became more widely accepted, many economic experts concluded that this principle has a broader application.
To make it easier to understand the importance of the Pareto Principle, here are a few examples of its application:
- In sales: 80% of a company’s revenue comes from 20% of its customers (the biggest customers keep the company stable)
- In marketing: 80% of new users or customers come from 20% of marketing campaigns
- In productivity: 80% of results come from 20% of tasks
This rule extends even to everyday life. If you pay attention, you’ll notice that 80% of your phone time is spent on just 20% of your apps. Also, anyone who watched the popular series “Adolescence” may have heard of the teenage rule, where only 20% of men are attracted to 80% of women.
Now that we have explained how the Pareto Principle works, let’s move on to why investing is essential and how to apply it. The answer is simple. First, it is necessary to identify the key activities your investment is based on, whether it involves the stock market, crypto, or real estate. Once you identify them, focus on the priority tasks and emphasize those crucial 20% that make the biggest difference. After doing that, you will notice that there are certain things you can ignore or neutralize within the remaining activities, since you have concentrated your efforts on what brings success.
50/30/20 Principle
Another method that can help people organize their income and identify mistakes is the 50/30/20 Principle. This rule was first introduced in the book All Your Worth: The Ultimate Lifetime Money Plan. In a short time, the book became a guide for many people in recognizing financial problems and organizing their budgets to live within their means.
Its main characteristic is its simplicity and ease of application, which is crucial for people without extensive knowledge of economics. The 50/30/20 principle balances three key aspects of everyday life: essential expenses, wants, and savings (investments). Warren uses this rule to motivate people to think long-term. As we have already mentioned, that is the most profitable approach to investing.
The 50/30/20 Principle is based on the following:
- 50% of your monthly budget: To cover essential living expenses necessary for everyday life. This includes rent (whether renting or paying off a mortgage), monthly utility bills such as electricity, water, heating, phone and internet services, food, health insurance, and transportation costs, whether for gas or public transit tickets. These are basic obligations necessary for living, so they are allocated the largest share.
- 30% for fulfilling wants: Humans are social beings. Therefore, need an outlet to stay happy, whether it’s vacations, dining out, shopping, online gambling, or similar activities.
- 20% for savings or investing: Although “only” 20% is formally allocated for savings and investments, people who own their property and have lower essential expenses than 50% can significantly increase this category. The same goes for those who prioritize savings over fulfilling wants.
The 50/30/20 Principle can also be applied exclusively to investing. For example, 50% of your investments should go into the “safest” investments, 30% into “mid-risk” investments, and the remaining 20% into “high-risk, high-reward” projects.
Dollar Cost Averaging (DCA) Strategy
With the DCA (Dollar-Cost Averaging) strategy, we move into a segment focused exclusively on investing. However, a similar principle can be applied to other fields as well. This strategy represents one of the most popular investment methods for volatile markets, significantly reducing the risk of failure.
DCA involves consistently investing a fixed amount of money into a specific ETF, cryptocurrency, or stock, regardless of its current price. For example, if you are prepared to invest $10 daily into Bitcoin, you would continue to do so whether Bitcoin’s value that day is $73,000 or $105,000. This approach encourages long-term thinking and dramatically increases the likelihood of achieving a better average price over time. History has shown that the periods when currencies peak are much shorter than when markets decline.
The main advantage of this strategy is its simplicity. It is beneficial for beginners who are not familiar with the market. Many investors have attempted to adapt this theory by investing weekly on a fixed day. Still, it has been shown that daily averaging is generally more profitable.
The DCA strategy significantly helps investors overcome psychological stress during market downturns. These drops represent new opportunities to purchase financial instruments at better prices. Additionally, it helps them overcome the fear of “perfect timing” for investments.
Other Investment Rules
As mentioned, investing is much broader than buying stocks on the stock market or trading cryptocurrencies. It can include anything that brings you profit. For example, purchasing real estate to preserve money from inflation or for later resale, considering that property prices have steadily increased in recent years.
Additionally, in the United States, there are unwritten rules for many other costs and investments that could unnecessarily “shake” your household budget. For example, when buying a car, it is recommended that the price of the vehicle does not exceed 10 to 15% of your total wealth. Also, the monthly installment for it should not exceed 20% of your monthly income. A car is primarily a means of transportation. It is illogical to own a vehicle that is nearly as expensive as your home if you do not have more funds. By following this rule, you will always have a vehicle that matches your lifestyle. The remaining money can be used for savings or investments in assets that can generate profit.
Finally, we will introduce you to another form of investment: investing in luxury items. This strategy is based on purchasing assets with long-term value and growth potential. It often comes down to exclusivity, which also characterizes these items, and is their cultural or aesthetic value. Of course, luxury artwork is the first thing that represents a synonym for this type of investment. These can be paintings, sculptures, or other artistic items by renowned artists, which can dramatically increase in value over time.
Conclusion
Everyone dreams of financial freedom. Still, for most people, it requires work. It does not come overnight; you have to work hard for it. For this reason, quality investing is key to achieving your goals and securing financial stability. Take your investing beyond relying on pure luck and speculation by studying and analyzing the market, as well as by applying some of the above-mentioned rules.
Diversification, choosing long-term investments, and setting limits are the foundation for any investment strategy. This can later be “upgraded” using principles such as the Dollar-Cost Averaging strategy. Focusing on the Pareto Principle can help you find your strengths and thus invest more wisely. In contrast, the 50/30/20 principle can help you identify unnecessary expenses you can minimize and redirect toward increasing your investments. Although the latter rule is not directly about investing, it has a substantial indirect impact on your investment budget. Additionally, investing in luxury items is a longer-term endeavor that requires expertise and careful market monitoring, but it can be very profitable if the right items are chosen. It is clear that by combining all these rules and strategies, you can create a strong foundation for your financial future.
Invest only as much as you are prepared to lose from the start, even if that amount is lower than the principles suggest. Adjust your capabilities to everything stated in this article; we believe you will notice a difference over time.
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FAQ
How can I determine my risk tolerance?
Risk tolerance depends on various factors and is primarily individual. It is determined by your financial goals, time horizon, and personal attitude toward loss — whether you are prepared to lose everything you invested or just a portion of it. If you fall into the second group, using a “stop loss” option mitigates potential failure.
How do we recognize fake investment opportunities?
Experienced investors can immediately spot fake investment offers, but scammers usually target beginners, so it is essential to know what to watch out for. If you are promised high and guaranteed returns in a short period, that’s the first sign something is wrong.
Is it better to invest independently or with the help of an advisor?
It depends on the type of investment and your level of experience. If you have enough knowledge and time, there’s no reason why you shouldn’t invest independently. On the other hand, if you are a beginner or do not have the time to dedicate to investing, working with a trusted financial advisor will undoubtedly yield better results than making decisions on your own.
How can emotions affect my investment decisions?
Believe it or not, emotions can significantly impact your investments. Periods of “bull markets,” when the entire market is growing and generating profits, often lead people to greed and the desire for even bigger gains, while fear works in the opposite direction. That’s why it is important to set a clear goal from the beginning and stick to it regardless of market movements.
How often should I monitor my investments?
The answer depends on whether you invested in the short-term or long-term. However, it is not necessary to check the value of your investments daily, as market volatility can cause stress and impulsive reactions you might later regret. If you cannot stop checking your investments daily, it may be a sign that you have invested more than you can emotionally handle losing.
