Basic Investing Concepts
November 29, 2006
You've taken the Type of Investor quiz, determined your investment objectives, and learned different investment options available to you. Now it's time to take a refresher course on some fundamental concepts related to investing.
No matter how trite this saying is, it still applies to you: Don't put all your eggs in one basket. Diversify your portfolio to ensure that funds are distributed among several different investments or instruments in order to spread out the risk. The more diversified a portfolio is, the less vulnerable the investor will be to the poor performance of a single investment.
Risk and Return
Risk refers to the uncertainty of the outcome of an investment. Typically, the higher the potential return of an investment, the less predictable is the return. In short, higher returns are accompanied by higher risks. It is therefore important for an investor to match his risk appetite with his chosen investment.
Long-term vs. Short-term investing (Investment Horizon)
Before making an investment, an investor should first assess for how long he intends to hold on to the investment. Generally, holding an investment over a long period of time works in favor of the investor because risk and uncertainty tend to reduce over time. If one prefers to invest only in the short run, he should place his funds in less risky and highly liquid investment products such as time deposits, treasury bills, and money market funds, among others. But if the investor is willing to accept a certain degree of risk and wish to invest for a long period of time, he may feel comfortable investing in relatively high yield but also high risk products such as equity mutual funds, Unit Investment Trust Funds (UITF), forex trading pool, etc.