6th June 2019 | Flawiusz Pawluk | Financial Markets Expert

How to become an investor?

Becoming an investor is like becoming an astronaut.  You must learn how to fly in space or on earth orbit. Once you find your direction and don’t lose orientation, everything becomes easy. However, if you don’t find your preferable or desired direction everything becomes complicated. Another problem is that you can change your direction only from time to time as there is no gravity at all.

The paradox of investing is this is not a science but an art. There is also a common opinion that the best investors are soldiers because of their discipline. I share an opinion that combat soldiers are good investors but not because of their discipline but rather due to their ability to properly asses the risk of failure like in a real battle. 

However, there is a big difference in the skills you need depending on whether you want to became active investors (actively trading on stock exchanges) or passive investor, who gives an mandate to professionals asset management companies, which will manage his funds based on investors instructions, risk profile, investment objectives and investment horizon.

Getting knowledge about investments is usually a first step in process of becoming an investor

There is also a large difference in the required knowledge depending on financial instruments of which you want to invest in. Generally, you can invest in:

  • Fixed-income instruments (bonds, bills, money market instruments), which require very basic knowledge and are the least risky financial instruments,
  • Equities (stocks), require very solid knowledge and are more risky than fixed-income instruments as you can potentially lose most of your capital,
  • Derivatives (futures, option, CFD), require very specialized knowledge and rather unique investment skills. In addition, they are very risky as you may lose more than you invested but also earn much more than you invested.

In all these cases, some knowledge about how the capital markets and economy works is essential. Therefore, the first step of any investor shall be in the direction of knowledge. There are many ways to increase your knowledge: we usually recommend looking into our blog and website when you can find a lot of useful information, or searching for the information on the internet.

Next step shall be assessing your risk profile and investment objective or in another words the direction you want to go

Generally, this appears not to be so easy as everyone want to achieve their goals in a relatively short period of time. But this is not always possible. So, you shall ask yourself another question? What is the goal I wish to achieve and how does this correspond with my risk tolerance. I will give an example: if you are a young student, you have plenty of time before your retirement and you probably do not have any children yet so you could be very aggressive, accepting significant losses in your wealth. Also, your investment objective could be very aggressive such as: I want to become a millionaire in the next 10 years by investing in stock futures. But, if you are over 40 years old, a hard-working father of three children, without any significant savings in your bank account, you probably will be very risk averse investing only in safe treasury bonds with investment horizon of some 5 years.

These are only two examples; however, they should give you some idea about what I mean when I talk about the different risk profiles and investment objective. An investment objective is what do you want to realistically achieve within an investment horizon and the risk profile is about how large the loss you can potentially accept. 

The third step is to improve your investment skills by regular training of your brain and psyche

This is not a joke. As with everything else in life, you can train your brain and your psych by investing virtual money in a virtual investment account. Let’s take a simple example: you choose one stock from DJIA as your investment and you must choose the most optimal moment to sell the stock during the next 3 months. When you practice this exercise, you will quickly discover that the moment you choose will always be the wrong time, which will generate a lot of frustration. But by persevering with the training, you will learn after some time that if your investment is doing well and is profitable you must be very patient but when it’s not, you must act rather quick.

Passive investment is an easier way to become an investor, however, you still must know what your key investment objective is

The reason that passive investing is more attractive, less time consuming and less frustrating is the fact that portfolio managers assess your risk appetite and the other parameters of your investment for you. You have only to know what your key investment objective and investment horizon is. Other elements of the most suitable strategy would be defined by your portfolio manager and would be based on the investor profile questionnaire which must be filled by any potential investor. Therefore, for beginners we always recommend choosing the passive investments in the first instance. 

Notice: Golden Sand Bank ("Bank") exercised due diligence to ensure that the information contained in this publication was not incorrect or untrue as at the date of publication. All Investment products are at risk, as their value can go down as well as up. The tax treatment of your investment will depend on your individual circumstances and may change in the future. If you are unsure about whether investing is right for you, please seek financial advice. This publication is not an investment recommendation or investment advice in connection with any services provided by the Bank to the Client.

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