Everywhere you turn someone's telling you that you should start investing. But what do you invest in? How do you invest? The key to investing wisely is having a solid working knowledge of what investing means and how it should be done.
Investment is the placing of funds for the purpose of getting some income return and/or an increase in the invested principal. Return in the form of interest constitutes a rental for the use of the money and as such has been socially acceptable for thousands of years; indeed, tablets and inscriptions from ancient Egyptian and at a specified rate was a common business transaction even in those days. The modern world contains many investment media; among them are real estate, life insurance, commodities, bonds, stocks, and savings accounts.
All forms of investment have in common the following characteristics : (a) the amount in-vested, called the principal; (b) the rate of re- turn, usually stated as an annual rate in per cent; (c) the degree of risk; (d) the liquidity, or how quickly the investment may be converted into cash; (e) the capital gain, or increase in the value of the principal, sometimes termed the grown factor. Assuming a certain principal amount, the other four factors vary widely with the nature of the investment.
In order to achieve high safety and high liquidity, growth and rate of return must be sacrificed. On the other hand should high return or growth be desired, it is equally apparent that some degree of safety and liquidity must be sacrificed. No investment will combine high safety with a high rate of return; these are always in inverse relationship, and it must be borne in mind that this is a basic fact of both savings and investment in general.
To be an investor you must first accumulate funds for investment, and safety in your savings plan is the first consideration. This will immediately limit the number of media into which such funds may be placed. After you have accumulated a sufficient amount, then will be the time to consider whether higher risks are justified.
How much should be the goal before further investment, with attendant higher risks, is attempted? The answer cannot be given in the form of an exact amount, because your total income and expenditures will have a bearing upon it; but most authorities agree that a "nest egg" or "rainy day fund" must first be obtained which is the equivalent of at least three months' salary. After that, further savings may be made for investment at a somewhat higher risk. Thus, if you guard against unforeseen emergencies, a program of investment with some degree of security and peace of mind may be undertaken. We must emphasize that no short cut should be resorted to here.
In other words, investment for the person of modest means is a series of steps: the gradual accumulation of surplus cash as a "rainy day" or emergency fund; the accumulation of an additional fund for investment; and the placing of this fund in investments which may entail somewhat higher risks.
Investing is nerve-wracking, particularly if you intend to invest money you have saved over a considerable period. However, investing that money wisely can pay off with patience and care if you invest carefully with a broker you trust, and as always, diversify, diversify, diversify.