Investment Rule 101
Do you know what investment really is?
To many with minimal finance knowledge, investment means making the most money with the least money (capital) in hand in the shortest time possible. There’s nothing wrong with that. In fact, it is ideal and probably the best proposal ever!
But is it true that such proposals exist in thin air? Does money come jumping in front of your face or falling from the sky?
There is a statement (amended version) put simply which we find particularly meaningful to explain this phenomenon or belief of free money:
“If there is such ideal formula to make money out of thin air, you’ll be so crazy over the idea of making money that you will DIE almost instantly!”
So, what is Investment in essence?
Quoted from Wikipedia’s definition:
“Investment is putting money into something with the expectation of profit. More specifically, investment is the commitment of money or capital to the purchase of financial instruments or other assets so as to gain profitable returns in the form of interest, dividends, or appreciation of the value of the instrument (capital gains). It is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance no matter for households, firms, or governments. An investment involves the choice by an individual or an organization, such as a pension fund, after some analysis or thought, to place or lend money in a vehicle, instrument or asset, such as property, commodity, stock, bond, financial derivatives (e.g. futures or options), or the foreign asset denominated in foreign currency, that has certain level of risk and provides the possibility of generating returns over a period of time.
Investment comes with the risk of the loss of the principal sum. The investment that has not been thoroughly analyzed can be highly risky with respect to the investment owner because the possibility of losing money is not within the owner’s control. The difference between speculation and investment can be subtle. It depends on the investment owner’s mind whether the purpose is for lending the resource to someone else for economic purpose or not.“
We would like to highlight few key points from the above definition in our financial advisors’ terms:
- outlay of money,
- expectation of profit,
- assumption of risks (potential loss of principal sum),
- returns in the form of interests, dividends, and capital appreciation,
- related to savings or deferred consumption,
- in ways of business management and finance,
- investment vehicle/ instrument/ assets such as:
- stocks, mutual funds
- futures or options, and
- over a period of time (duration: short or long term)
- purpose of lending resource: Is it for economic purpose?
- fine line between investment and speculation.
We are not here to judge on your behalf if your investment is prudent or wise. Just a series of highlights we wish you are clear about before you consider yourself a prudent investor who has taken into consideration most of the necessary calculated risks.
But then again, a fully cost-effective investment proposal is not necessary and not viable because that does not justify the potential rewards in return if you are not a big player.
A wise Income allocation model recommended by mainstream financial advisors would be the
- 60% of your annual income goes to daily expenses, leisure, tax, loan repayments
- 20% for short term savings, children education and insurance
- the remaining 20% is for long term savings and investments which includes planning for retirement savings.
Does this quote sound more like investment wisdom or investment winning formula to you ?
Some investment quotes to note a few. Sourced from Google Images
We’ll introduce another investment theory 10:20:70 Rule in the near future. To get the latest updates, you can subscribe via email if you find what you learn here useful.
To conclude with, we hereby give you an additional quote from the famous Thomas Moore on luck:
“Care and diligence bring luck.” – Thomas Fuller