Five basic investment concepts that you should know (2024)

FAQs

What are the five basic investment considerations? ›

By following these five essential investment principles — setting clear financial goals, diversifying your portfolio, understanding your risk tolerance, investing for the long term, and conducting thorough research — you can position yourself for long-term financial success.

Key Takeaways

Have a plan, prioritize saving, and know the power of compounding. Understand risk, diversification, and asset allocation. Minimize investment costs. Learn classic strategies, be disciplined, and think like an owner or lender.

Let's kick it off with some timeless advice from legendary investor Warren Buffett, who said “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.” The Oracle of Omaha's advice stresses the importance of avoiding loss in your portfolio.

Warren Buffett's investment strategy has remained relatively consistent over the decades, centered around the principle of value investing. This approach involves finding undervalued companies with strong potential for growth and investing in them for the long term.

The rule states that stocks, bonds, and cash yield average annual returns of approximately 10%, 5%, and 3%, respectively.

Popular investment philosophies include value investing, focusing on shares that the investor believes are fundamentally underpriced; growth investing, which targets companies that are in a growth or expansion phase; and investing in securities that provide a return in interest income.

What are the six 6 criteria for choosing an investment? ›

Answer and Explanation: The priority for an investor is sufficient liquidity. Liquidity allows an investor to buy and sell quickly without spending too much money on processing costs. Additionally, it allows an investor to ditch losing investments when a downward trend is observed quickly.

Most successful investors start with low-risk diversified portfolios and gradually learn by doing. As investors gain greater knowledge over time, they become better suited to taking a more active stance in their portfolios.

Amount: Aim to save at least 15% of pre-tax income each year toward retirement. Account: Take advantage of 401(k)s, 403(b)s, HSAs, and IRAs for tax-deferred or tax-free growth potential. Asset mix: Investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.

Key Takeaways: The rent charged should be equal to or greater than the investor's mortgage payment to ensure that they at least break even on the property. Multiply the purchase price of the property plus any necessary repairs by 1% to determine a base level of monthly rent.

The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. Dividing 72 by the annual rate of return gives investors a rough estimate of how many years it will take for the initial investment to duplicate itself.