The topic of investment has become a popular topic of conversation, especially among young people. The general advice that is usually given is to start investing as early as possible. However, it is not uncommon for many young people to jump right into the world of investing without first knowing the basic principles. This can cause you to lose precious money. Therefore, this article will explain some of the basic investment principles that you need to know before diving into the world of investing.
- 🎓 Learning the basic principles of investing can help avoid losses at the beginning of investing and personalize the plan to the needs and financial conditions of each investor.
- 🆕 The mistake that many novice investors make is using money from their daily needs for investment purposes.
- ⚠️ Risk management is a crucial part of investing. You need to understand which investment instruments have high and low risks and then adjust them to your financial condition and investment plan.
- 📈 An important principle for investing in cryptocurrency is to understand the dynamics of the market, especially when to take profits and prevent them from turning into losses. In addition, we need to have an understanding of each crypto and not be affected by FOMO and FUD.
Why Do We Need to Understand the Basic Principles of Investment?
Most people often feel confused when they want to start investing. Where to start? How much do you need to invest? Invest in what assets? Some of these questions are good questions about investing in general. It’s better to start investing with hesitation than to dip your toes without knowing anything.
We must first start investing in knowledge and principles of investing to avoid early losses. Some of the investment principles below are not only useful for new investors but also still apply to experienced investors. Sometimes recalling basic principles can help us re-evaluate strategies.
So, here are five basic investment principles that you need to pay attention to:
1. Define Investment Goals, Targets, and Priorities
The main principle when you want to invest is to have clear investment goals, targets, and priorities. These three things will help you determine the asset you choose, the amount, and the frequency you invest.
Investment goals and targets are related to the amount you want to achieve and the timeframe for achieving those goals. It is closely related to whether you invest for the long, medium, or short term. You can define your target with a SMART framework (specific, measurable, achievable, relevant, and time-based).
For example, if you have a big goal and choose 7 years to achieve it, you can spread your investment into high or medium-risk assets that have high potential in the future (crypto assets, stocks).
Furthermore, the priority in investing is closely related to your financial condition. If you don’t have an emergency fund and savings related to more urgent needs, investing automatically becomes a low priority. Always prioritize funds for needs. When this is done, you can focus on prioritizing and building an investment portfolio.
2. Using Idle Money
The most common mistake made by many novice (even experienced) investors are using their daily money for investing purposes. This is usually because they are tempted by quick profits. This is especially common in the crypto industry. You can find various stories on Twitter like someone using family savings for investment and suddenly losing everything.
The lesson we can take here is to always use “cold money” to invest. The term “cold money” refers to idle money that you don’t use for daily needs. This principle is carried out to reduce the risk of a domino effect from experiencing losses in investments.
💡 This advice is similar to the advice “Never invest money that you can’t afford to lose” which also emphasizes not investing using money that you need for living cost.
3. Risk Management
Risk in Investing depends on the type of asset you choose. Investing in a business, property, mutual fund, stock, and crypto has its own level of risk, drawbacks, and advantages.
Managing risk is also closely related to your financial condition. Investing in high-risk assets is not an option for everyone. Everyone also has a different tolerance for loss. Therefore, choosing the right investment instrument is part of risk management.
Risk management helps you to adjust your investment to your financial condition. Investment does not have to be like gambling, you can choose low-risk investment instruments so that you are confident in your choice. In the end, you have to determine for yourself how much risk can you tolerate? What percentage of possible losses are you willing to tolerate to get profits?
4. Know Your Own Investor Profile
According to Benjamin Graham, a mentor of the famous investor Warren Buffett, we should know the investor side in each of us. In general, there are two profiles of investors, namely active and passive investors. Graham referred to these two profiles as “enterprising investors” and “defensive investors.” An important element that distinguishes the two is effort and time.
💡 Benjamin Graham believes that profit is not determined by the risk related to an asset, but by the effort and time we put into it.
Being an active or enterprising investor is someone that is willing to take the time to study each asset in detail and make sure we understand the market dynamics, and fundamental, and technical analysis related to it. Active investors dive into a risky asset to get bigger profits. On the other hand, passive or defensive investors do not need to spend a lot of time researching and choosing more stable investment instruments. Investors of this profile will not get big profits but are more resistant to price fluctuation and more stable.
This raises a question that every investor must answer. How much time and effort are you willing to dedicate to your investment? If you can’t or don’t want to do your own research, you’re better off being a passive investor and choosing “stable” assets like money market mutual funds, blue chip stocks, bonds, and time deposits. On the other hand, if you want to put in the work, you can become an active investor researching each stock or crypto asset before buying.
Diversification is a part of risk management strategies in investing. It is also one of the most important basic investment principles used by experienced investors. The main purpose of diversification is to reduce the risk of loss if one of your investment assets underperforms. In addition, diversification can also increase the possibility of profit. If you spread your investment across several different assets and all of them increase, you will get more profit than relying on just one.
💡 Don’t put all your eggs in one basket is a proverb that advises not to risk everything on the success of one business or asset.
In general, diversification can be divided into two ways:
- Spreading funds between several assets in one type of investment instrument. Example: investing in SOL, ETH, BTC, NEAR, and FTM in the crypto industry.
- Spread funds to various types of investment instruments. Example: investing in stocks, crypto assets, and mutual funds.
The first is mainly done to get a higher return on your investment in the industry. This version of diversification is mainly carried out by experienced investors who already have a detailed understanding of assets and the dynamics of the market. The downside of this strategy is that it is quite a high risk, especially for novice investors.
On the other hand, the second method is an ideal strategy for novice investors who are afraid of making big losses and don’t want to venture deeper into any of the investment instruments. By spreading to various types of investment instruments, the risk that you will lose all your investments is very small. However, the disadvantage of this diversification method is that the potential profit is smaller.
The most ideal strategy is that you do both. This can reduce the risk of large losses while increasing the probability of profit. However, not everyone can do this because it requires a large amount of investment and a deep understanding of the market and the assets. Therefore, at least do one of the two ways of diversification.
Specific Principles for Investing in Cryptocurrencies
1. Take Profits!
This is one of the basic investment principles in crypto. The principle is especially useful if you are a short or medium-term investor. Take advantage of the rising momentum of the crypto market by taking some profit from your investment. This is especially important in a bull market. Don’t lose all your crypto assets because you are waiting for higher prices. Determine what percentage you will take from your total profit or take all the initial capital you have invested.
This principle is important in the crypto market because its fluctuations can wipe out all your profits overnight!
Read more: 8 things to learn before investing in crypto
2. Watch out for FOMO and FUD!
Another important principle for investing in cryptocurrency is to pay attention to FOMO and FUD. FOMO or fear of missing out is the fear of missing out on trend. Meanwhile, FUD (fear, uncertainty, and doubt) is the term for misinformation tactics to keep investors from buying an asset. FOMO can make you buy a crypto asset because you have the urge follows the trend without researching and reading. On the other hand, FUD makes you scared and confused because of negative information about an asset.
Both have a negative impact on you as an investor. The best trick to avoiding FUD and FOMO is to gather information from multiple sources to keep you neutral and objective.
Read more: FOMO and Psychology in Trading
Start Investing in Crypto!
You can start investing in cryptocurrencies in the Pintu app. Through Pintu, you can buy cryptocurrencies such as BTC, ETH, SOL, and other cryptocurrencies in an all-in-one convenient application.
Pintu is also compatible with popular wallets such as Metamask to facilitate your transactions. Download the Pintu app on Play Store and App Store! Your security is guaranteed because Pintu is regulated and supervised by Bappebti and Kominfo.
You can learn more about cryptocurrencies through the various Pintu Academy articles that we update every week! All Pintu Academy articles are made for educational purposes only, not financial advice.
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- Principles of Long Term Investment Success, TIAA, accessed on 13 July 2022.
- The basic principles of sound crypto trading, AAX Academy, accessed on 14 July 2022.
- Joshua Kennon, The Most Important Rule of Investing, The Balance, accessed on 15 July 2022.
- 9 Principles Of Investing For Beginners, Funding Societies Blog, accessed on 18 July 2022.