The potential financial results of investing can feel limitless, and it can be tempting to think that just one stock pick could make you an overnight millionaire. Yes, stock-picking can have a place in your investment strategy, but if you’re focused on the allure of a “get rich quick” mentality, you may be gambling, not investing.
What’s the difference?
One of the key differences between investing and gambling is process and strategy. If you don’t have a process and strategy in place, it is a sign that you need to establish or refine your plan. Further, gambling focuses on emotions such as hope. Investing, on the other hand, is all about strategy. With a clear strategy, you know approximately how much your investments will grow and over what time horizons.
How do you know if you’re investing effectively?
If you’re unsure whether your current investment approach is working to realise your goals, think about your investment process and how many of the below five elements are included in your approach.
Completing no research
If you’re not completing any research and putting money into assets based on tips from friends or what you see on social media, you’re exposing yourself to increased risk and not doing enough due diligence.
Investing in micro-cap stocks only
Micro-cap stocks typically have a market capitalisation under $500 million and are ranked from 350 to 600 on the Australian Stock Exchange. With a relatively small market capitalisation, buying stocks in these companies can be cheap. The downside, however, is that these companies are usually in their infancy and experience volatile price fluctuations. There’s a place for micro-cap stocks in your investing. However, if you’re putting all of your money into these companies, you’re likely exposing yourself to unnecessary risk.
Investing with short time horizons
Putting all of your money into short-term investments or activities such as day trading is an indication that you’re too focused on short-term gains without a long-term strategy. There’s a place for short time horizons in your investing, but only once you’ve mastered the foundations such as establishing a long-term plan and ensuring you have adequate cash buffers.
Lack of diversification
If all of your money is invested in one asset class, you’ll be over-exposed to volatility in a single market. To ensure your money grows consistently over time, your money needs to be balanced across a range of asset classes and sectors.
Having no investment strategy
If you don’t have an investment strategy, your investing won’t be as effective as it could be. To start putting together an investment strategy, you need to think about things such as:
- building up adequate cash buffers;
- how much money you need invested to live comfortably off your returns; and
- when you anticipate you’ll start drawing an income from your investments.
Moving forward with a long-term wealth strategy
Investing in different asset classes such as equities, commodities, and fixed-income assets is a great way to build long-term wealth. To build this wealth, however, you need a strategy and process to follow.
If you’re unsure how to develop an investment strategy, be sure to seek qualified financial advice. Investing in this advice now can reap great rewards in the years to come, ensuring your money is working to help you realise your financial and lifestyle goals sooner.