Rationale For Investing

One of the key criteria to astute investing is to consider how and when you will take your profits – in other words you need to develop an exit strategy before you invest in the share market. This is crucial to your success simply because while an asset may rise in value, it is not realised until you sell. And because there is a possibility that an asset can fall in value you need to consider how and when you will exit if your investment turns sour or does not perform as expected.

Another key criterion to astute investing is to consider your rationale for investing in a particular asset in the fist place. If you do not understand the consequences of your investment strategy, you are taking higher risks and there is a high probability that you could lose. For example, many investors got caught up in the hype of the tech boom in the late 1990’s, investing large sums of money in the hope of making a fortune.

Media hype and speculation fuelled the misconception in the marketplace that ‘blue chip’ shares were out dated and that technology stocks or ‘dot com’ stocks were the growth stocks of the future. This misleading information permeated the market causing mass greed resulting in share prices skyrocketing to many times their true value. Many investors even forgot to consider the basic economic fundamentals of successful companies, ignoring the fact that many of the ‘dot com’ companies had no assets and were yet to make a profit. As a consequence, a lot of investors lost money and time in creating a wise investment portfolio.

Astute investing, however, has always been and will always be about risk management – which means every time you invest there will be a certain level of risk for the reward you are chasing. The astute investor always invests in assets that deliver the lowest possible risk for an acceptable return and not as many did in the tech boom investing for maximum reward and taking on excessive risk. Despite popular belief, real wealth does not come quickly; rather it comes from the continuous pursuit of accumulating good assets that provide capital gain and income.

Unless you understand the consequences of your investment decisions, it is better to invest your money in an average investment, like a bank term deposit. While your return may be lower, you are eliminating the risk associated with these higher risk investments.Dale Gillham is the director and founder of Wealth Within, an Australian-based company specialising in share market education and independent investment advice. Dale is the author of the book ‘How to Beat the Managed Funds by 20% and Australia’s first and only accredited Diploma of Share Trading and Investment. For information visit www.wealthwithin.com.au

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