Today, November 4, the Financial Education Day. For those starting out in the investment universe, the first thing to know is that to invest It is not an easy task, but it is not an activity reserved only for economists or people with a lot of money. You can invest from a single euro to try to make your capital profitable, especially in times of inflation. With inflation soaring, money quickly loses purchasing power. As Rafael Juan y Seva, president of Finletic, points out, “saving is giving up an amount of money in the present to be able to use it in the future. However, the money saved does not grow.”
Of course, if you decide to take the step, it does not hurt that the notable investor takes into account a series of basic tips so as not to fall into the most common mistakes. According to experts, certain knowledge can be acquired by being informed and little by little with experience.
1. Invest so as not to lose purchasing power: “Investing implies allocating the money saved to the purchase of assets, with the aim of obtaining future profitability, in many cases uncertain,” Rafael Juan y Seva points out. However, inflation is the silent enemy of savers. For example, if you have 100 euros and assuming that there is 2% inflation every year, of those 100 euros you can only buy the equivalent of 98 units. That is, even maintaining 100 units, over time, the purchasing power will decrease. The only alternative, so as not to get poorer over time, is to invest the money saved.
2. Diversify (not have all the eggs in the same basket): Investing is, ultimately, is managing risks. It is important to diversify (countries, sectors, asset classes, currencies …). The way to protect yourself against the risk of permanent loss of money is to distribute the investments in a poorly correlated way. “Risk management must be prioritized over potential profitability”, Rafael Juan y Seva asserts.
Sometimes, wanting to maximize profitability, you can fall into unforeseen risks and lose a significant part of the investment. When investing, there are two types of structural risks: first, that a large investment is passed, and second, making a bad investment, which can make you lose all the money. You have to avoid the second. When starting to invest, it is recommended that most of the investments be liquid, to have room for maneuver if cash is needed, in the face of unplanned events.
3. Be clear about the objectives: Equity is a means to an end, therefore, it must be at the service of the investor’s objectives, and not the other way around. It is much more important to know what you want to achieve, than to look for a set of “good” investments to earn a lot. When you can gain a lot, you can lose a lot. Therefore, maximizing profitability is not always the main objective.
It is essential to start by reflecting on the objectives and needs to be satisfied, since investors can have a multitude of objectives: Buying a house, unforeseen events, paying for university, retirement, philanthropy, etc. Depending on the objectives to be met, specific objectives will have to be defined in each case. This will help to break down a “big problem” (our life) into smaller, simpler “problems” (concrete objectives).
4. Define the time horizon: Once the objectives have been defined, they will be translated into investment parameters. It is not the same to invest in the short term as in the long term. For example, investing to maintain a standard of living would be framed within a short-term objective (12-18 months), where it is essential to preserve the nominal value. Availability takes precedence over anything. If what you want is to finance a professional project, the investment portfolio improves in the medium term (18 months-5 years), with the aim of maintaining purchasing power. If what is sought is, for example, intergenerational transfer of assets, then the investment must be long-term, the objective of which is growth above inflation, expenses and taxes, and additional profitability.
5. Choose the strategy: For the beginning investor, the simplest way is through financial investments. They are listed on organized markets and offer exposure to any company in the world or to debt issues. The best known vehicles are investment funds, which facilitate access to the different asset classes (monetary, fixed income, equities) in a professional, regulated manner and at reasonable costs.
There are a multitude of funds of each asset class, being able to invest from 10 euros, compared to the greater investments necessary to access real estate or companies. In addition, they allow you to defer the payment of the tax, until you decide to sell, and considering risk management, it is easier to diversify than with the direct purchase of stocks and bonds.
The choice of the final strategy will depend on the objectives to be covered: amounts, knowledge and capacities of the investor, but, regardless of this, investing through an investment policy, and managing risks, will not only avoid becoming impoverished with the passage of time. time, but it will allow to increase the patrimony.
6. Do not over-invest or over-trade: The first fundamental of stock investment is to invest only the capital that is not needed, since it is possible to lose the entire investment in the worst case. You just have to invest the money that is not essential in the short. In addition, according to BBVA, entering and leaving the market too many times increases the cost of operations and implies losses if the expenses associated with trading operations, such as commissions, are taken into account.
7. Cut losses: The theory says that you have to let the gains run and cut the losses. That is, hold the moment to sell when the stock rises, but do it more or less quickly when its price falls. However, most people act the opposite way. The first thing that must be determined in an operation are the handicaps that one is willing to assume.
8. Do not get carried away by emotions: It is likely that over time the investment portfolio will decline at some point, but in these cases impulsive decisions must be controlled and focus on strategy.
9. Run away from rumors: It is very common for novice investors to seek advice from the most experienced through forums and other means. And here comes the most common mistake, relying on dubious information or operating on the basis of rumors. Learning to differentiate the sources of reliable information from those that are not, is perhaps the most complicated task, but also the most important if you want to pay attention to the voices that surround the market. The same can be said for the analysts and their recommendations. Not all of them will be adapted to the specific strategy of the investor, and therefore, not all of them will be valid for their operation, they explain on the BBVA website.
10. Discover new options and alternatives: Faced with the traditional options of investing in products recommended by the banks themselves through their brokers, other alternatives have been born, such as online brokers and robo advisors. From the financial portal HelpMyCash they explain that online brokers are entities that function as intermediaries in the investment world. “With them you can invest in mutual funds, in stocks or also in other products. The commissions are generally low and even some brokers low cost allow you to operate without buying and selling commissions “, they say. robo advisors o automated investment managers are entities that automate certain processes and that offer the client a selection of portfolios adapted to their profile and risk tolerance. They work with a computer system configured based on the knowledge, strategy and experience of a team of investment experts.