What is Investing?
If you aren't investing then you should start now, the sooner you start the better. Investment returns discriminate according to one's age or more precisely time horizon. Not only does it take years of experience and knowledge to be a great investor, but it also takes time.
Disclosure: #Steemleo is running a weekly contest and this is an entry for "What does investing mean to you?"
Investing is Objective
Investing is not subjective although some components can be personalized, investing is the act of committing capital with the expectations of obtaining profit. People often confuse the hard work with investing-this is a colloquial meaning; you don't invest in yourself, you can spend time to improve yourself which may or may not lead to profits. Investing is for-profit otherwise it is considered charity.
Type of Investments
One can invest in a business, inventory, bonds, land, term-deposits, equities, precious metals, commodities, mutual funds, alternative investments, derivatives, and currencies. Some investments pay a regular stream of income in the form of interest, dividends, rent or some form of an annuity. Other investments only realize profit upon their sale or in other words a capital gain.
Investing Involves Risk Management
Some investments are low risk or even guaranteed by a sovereign nation's ability to raise taxes, others are high risk or speculative. Don't confuse gambling with investing, investments are for the expectation of profit, they are based on reality and are not of dreams. Whether you are investing for yourself or for someone else, one of the most important factors to consider is one's risk appetite, or how tolerant they are of loss, investments with a higher rate of expected return generally bear more risk.
Another more important factor to consider when investing is ones time-horizon. You cannot expect a major investment to generate an immediate return. There are sunk costs which must be recovered, certain events must happen without setbacks before profit can be realized. In general, one should only invest in a savings account, guaranteed income certificates or short-term bonds if their time horizon is under three years. If you are investing in equities or other more speculative assets be prepared to hold your investment for at least five to ten years.
Rate of return for an investment or profit over time is an important determining factor of investing. We want to maximize our returns and minimize our risk. Investing is a calculated risk one takes with as much information as possible, otherwise, it is speculation. When someone speculates, they are taking a huge risk with their investment, they could lose it all! Purchasing cryptocurrency with the expectation of quick profits is a good example of speculating. I don't consider cryptocurrencies as investment-grade assets, they are highly speculative.
Asset allocation is where you invest is the most important determining factor of returns. Diversification is important to reduce risk. There is passive investing where one buys an extremely diverse portfolio in hopes of achieving an average return and there is active investing where one tries to beat the market. Unless you are highly skilled and have a lot of money, passive investing is a better pursuit than active investing. Some semi-active strategies such as portfolio rebalancing can help achieve above-average long-term returns.
Timing the Market
Timing the market is when to invest only explains a small portion of long-term returns. People analyze history to try and predict the future with Technical Analysis, this is the charts and lines you often see. Chartists believe they won't repeat the mistakes of the past and can predict future price movements with fancy graphs although few succeeded in the long run. Timing the market often goes both ways and the vast majority of investors cannot time the market in the long run.
One overlooked consideration is ethical investing, or investment constraints. Some prefer not to invest in weapons manufacturers, environmentally harmful industries such as coal, companies which harm animals or produce harmful substances such as alcohol and narcotics. These are personal constraints which impact an investor's decision-making process.
Before one invests, they should carefully analyze the markets or find someone they trust to help them. Investing is not to be taken lightly, people spend more time choosing a car, a new outfit, or a kitchen table than on their investments and this is sad. Proper financial advice and knowledge are critical to making important investment decisions.