How to become a Smart Investor

Robert Kiyosaki, author of Rich Dad, Poor Dad – The #1 best-selling personal finance book of all time says “Investing is not a get-rich-quick drama.  Investing is a plan, often a dull and almost mechanical process of getting rich.”

He further adds that “Investing is less risky than being an employee. Skilled investors are in control of their investments; employees are under the control of their employers.”

To start with investments we have to first pay of costly loans like credit card dues, personal loans etc and reduce the expenses so as to have some money in hand. From there we start with the investment process. Every individual have different objective and risk taking capacity; for example if our goal is security and comfort rather than riches, we should keep our investment in fixed income securities etc.

Let’s discuss the simple tools for making smart investments and how to achieve a secure financial base. These rules are to have a basic understanding and to be an average investor.

Basic Rules for Investing

Let’s start with the basic rules. If we follow these rules during our journey towards financial security and freedom, they’ll keep us on the straight and narrow path toward comfort and security.

1: Know what kind of income from the investments

Returns from investments are in terms of dividend, interest, capital gains etc. Before making any investment we should know that what type of income we want to receive and accordingly the investment decisions should be made. Are you dealing with ordinary earned income like from the salary or returns from the portfolio, i.e. Rent from property, dividend or interest as a passive income?

2: Find the ways to earn passive income

By investing in those assets by which the money can start working for us is a smart investment decision. For example, buying a property and put on rent or investing or in the fixed income securities or investing the profits (rent income or interest) in securities to get a regular income for a positive cash flow. We can take the help of a financial advisor can help us to handle investments in ways that maximize tax efficiency.

3: Buy assets with positive returns.

Financial assets like shares and bonds can lose value and become liabilities. While no investment is risk-free, the educated investor will strive to buy those type of financial assets that provide a good return on investment.

4: Take smart decisions use the opportunities

A smart investor buys undervalued securities in a bear market or lucrative real estate in foreclosure. A bad investor enters when the market is on its peak and locks in losses on a stock by panicking in a market slump. An smart and educated investor takes decisions based on fundamentals and keeps his emotions away from investment decisions.

5: Be prepared for eventualities. No one can predict the future.

As a smart investors we should know market and economy’s future direction is based on various reasons and we cannot control the these factors or the market, let alone the global economy. Therefore having good understanding of market and taking decisions based on the overall investments objectives (long terms or short terms etc) is the best way to counter it. Accordingly a financially intelligent investors thinks confidently and creates opportunities out of the problems.

6: Have defined financial goals

If we have defined place to travel we can find out the best way to reach there. Similarly if the financial goals are defined and clear it would be much easier and achieve them. An investor can accordingly use the right tools (fixed income securities for short term and equities for long term etc ) to achieve them.

7. Understand risk and reward relationship.

Generally Risk and Return are directly proportional and moves in same directions, means higher the risk may give higher returns. There is risk in every investment, but risk is a relative term. An investor who understands financial statements of company and can evaluate a business system, or take the pulse of the stock market has a greater chance of buying an good stock than a dud one. Since risk is often directly proportional to reward, anyone who hopes to become wealthy must be able to invest more aggressively than someone who’s content to be secure. The more financially educated you are, the less risk you’re taking.