Three Investment Lessons for Young Investors

How to Identify Your Risk Tolerance 

Money is not the only thing you need when you want to invest, you also need to understand your risk tolerance level. If you start investing money without evaluating your risk tolerance level, you might encounter a huge debt. You might also have to consult a financial advisor before investing, but that is another subject of discussion, here we will talk about how to identify your risk tolerance level but before that, we need to talk about what exactly is risk tolerance level?

Let’s say you invested $1000 in the stock market. If the market crashes or the company you bought goes bankrupt the value of your stock might become zero? What will this mean to you financially?

This is a loss but you can still manage your life

You become broke and you have no way to support your life

It is a loss but with hardship, you can go on.

These three different situations will help you understand your risk tolerance level?

Having a high-risk tolerance level means you can support yourself despite losing your entire life. You will face hardship but you can still go on means you have a moderate risk tolerance level and if you become broke, you have a very low-risk tolerance level. Once you know your risk tolerance level you can start investing accordingly.

How to Diversify Your Investment

Here are some of the basic rules of investment:

Understand your risk tolerance level,

Invest only in the assets that match your risk tolerance level.

Invest only the amount that matches your risk tolerance level.

Never invest the amount that you cannot afford to lose.

Diversify your investment portfolio.

What does it mean to diversify your investment?

Diversifying your investment means putting your investment in different assets and investing in different markets. For example, when you are investing in the stock market, you buy stocks from A, B, C, D, and E companies instead of putting your all money in one of these stocks. Diversifying also means instead of investing only in the stock market, you invest in different markets such as stock market, mutual funds, treasury bills, real estate, equity, or crypto.

What happens when you diversity your investment?

When you diversify your investment, you will minimize your risk. For example, if you lost money in A  and B stocks, you still have C, D, and E to make you profits and recover your loss. If you lost money in the stock market you still have mutual funds or real estate to recover your losses, and even make profits for you.

How to diversify your investment?

Do the research and identify less risky markets and divide your money between these markets.

Three Investment Rules You Should Know Of

If you want to start investing or if you have already started investing, here are the three investment rules that you should know of and even better if you start following these rules

The 100 - X Rule: Imagine your age is X. The number you get by subtracting your age from 100 should be your total investment in stocks or equity. Let's say you are 30 years old, when you deduct 30 from 100, you get 70. Your total investment portfolio on equity and stock should be 70 percent of your investment. If you have a $1000 investment, $700 should be in stocks or equity and the remaining 30 percent on other markets.

Rule of 72: Whatever returns you are receiving from your investment and if you divide 72 with that number, you will know when your investment portfolio will double. Let’s say your rate of return is 10 percent, and when you divide 72 by 10, you will get 7.2. Your investment will double in 7.2 years. While this is not the exact number when your investment will double, it is almost near that figure.

40 Percent Rule:  Whatever you earn in a month, the money you spend on debt repayment should not cross the 40 percent mark. If you make $1000 per month, your debt repayment should never be more than $40o.