Investment Strategies for Households

Rules of Investing to Achieve Long Term Financial Gains

Sep 3, 2009 Wei Yin Wong

To invest money wisely, families need to buy quality assets, diversify investments, make use of compounding interest and beware of changes in the financial world.

Using investments to generate income can certainly help increase family wealth. But how to start investing? What products should be invested in? The answers lie in investment strategies that all investors – both new and seasoned – should follow to achieve long term financial gains.

Here’s a quick look at some basic rules of investing.

Invest Only in Quality Assets

This is a given but how does an investor buy only quality assets? How to make sure a company share or property will increase in value and bring more return over time?

For shareholders, it’s important that they research companies properly before making their investment decisions. Don’t know where to start? Visit the page designed especially for new investors on the Australian Stock Exchange website. There are step-by-step guides, free online courses and other investing resources for would-be investors. Consider signing up for free seminars on how to trade shares online as well.

As for property investors, they should choose properties in good locations with easy access to highways, logical floor plans, abundant natural light, good heating and cooling systems and ample storage. Try the Property Reports section of the Domain website to search for quality real estate.

Diversify Investments

Never put all the eggs in one basket. It’s just too risky. That’s why smart investors diversify their investments to spread and reduce the risks involved. Have a mix of cash, fixed interest, share and property investments. Cash and fixed interest investments typically generate modest but secure returns while their riskier counterparts – shares and properties – often yield higher returns.

It’s also a good idea to invest in different sectors of the same asset class. After all, different market sectors perform well or badly at different times. This is particularly true when investing in shares and stocks. If investing for a long term, it's a good idea to buy eight to 12 good stocks from different industries instead of just two or three.

Make Use of Compounding Interest

The power of compounding is quite astonishing. The interest earned on an investment will compound or multiply if the returns are re-invested instead of spent. It simply means earning interest on interest. And over time, the returns can be many times more than what is invested.

The trick is to start saving and investing early to make the best of compounding interest. Families with children should really take note of this. Get the kids into the habit of saving from young. Young working adults who save regularly can benefit from it as well.

Beware of Changes in the Financial World

Economies work in cycles. They go up and down. New management, political and scientific events may also affect companies. Investors who are alert of changes in the financial world are often more prepared to face unsettling news about the economy or investment markets.

Follow the market. While it’s fine to take greater risks during financial booms, it’s best to exercise caution in a fluctuating market. Don’t worry about netting a smaller profit by selling too soon. This is better than suffering a big loss by holding on to a stock for too long.

There are many investment strategies to generate more income for families. Investors should start investing by researching the companies whose shares or properties they plan to buy. They should also diversify investments to reduce risk, make use of compounding interest and beware of financial changes and trends.

Found this article useful? Read also Investing Basics for Families, Household Investing Tips and Tax Effective Investments for Families.

References:

Knight, Anneli and Graham, Virginia. Flirting with Finance. New South Wales: Fairfax Media Publications, 2009.

Koch, David. Kochie’s 101 Ways to Survive 2009. Melbourne: Wilkinson Publishing, 2009.

The copyright of the article Investment Strategies for Households in Family Finances is owned by Wei Yin Wong. Permission to republish Investment Strategies for Households in print or online must be granted by the author in writing.

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