Investing Isn’t About Perfect Timing. It’s About a Long–Term Approach
Investing is becoming an increasingly common part of people’s financial lives. People are realising that money set aside for the long term can have the potential to grow, and that the future cannot be built on savings alone. At the same time, it has never been easier to access a wide range of investment opportunities. Simply go online and, within minutes, you can come across shares, funds, bonds, cryptocurrencies or offers from various investment projects.
And this is where the first problem can arise. There are so many options available today that people sometimes start thinking about the investment itself before they have even answered the question of why they want to invest. Yet this is precisely the question the whole process should begin with. Investing means something different to someone building up a retirement reserve for thirty years’ time than it does to someone who plans to use the money in five years. It is therefore essential to think about the goal and the time horizon. The longer the money can remain invested, the more room an investor may have to ride out short–term fluctuations in the financial markets. A long time horizon, however, does not in itself mean that a person has to take on a high level of risk. Time itself can be a significant advantage. A young person with several decades until retirement is in a different starting position from someone who will need their money within a few years. A longterm horizon may allow for a greater focus on growth–oriented investments, provided this is in line with the investor’s goals, experience and willingness to accept fluctuations in value. However, this is not a universal rule. There is no single right investment for everyone. Nor is it necessary to wait until it is possible to invest a large amount. For long–term goals, regularity may be more important than trying to identify the perfect moment. Regular investing can gradually help build wealth while also spreading purchases over time. This means a person does not have to constantly wonder whether today is the best possible time to invest. Regular investing, however, does not protect against a fall in the value of an investment. Another fundamental principle is diversification. Put simply, it means not putting all your eggs in one basket. Spreading investments across different types of assets, regions or sectors can help reduce the portfolio’s dependence on the performance of any single investment. Diversification does not, of course, eliminate risk. It is, however, one of the basic ways of managing risk when investing.
Return Is Not the Whole Story
One of the biggest attractions today is the returns being advertised. Online, it is very easy to come across offers highlighting attractive returns and promising interesting investment opportunities. A percentage figure can capture attention very quickly. But return is only one part of the investment story. It is equally important to know who is offering the investment, how the company operates, what the money is actually being invested in, where the return is expected to come from, what the risks are, and what could happen if the investment does not perform as expected. Costs, withdrawal conditions and the option of exiting the investment early are also important. This is where an inexperienced investor can easily be drawn in by an attractive promise without checking all the key information. In the worst–case scenario, they may lose not only the expected return, but also part or all of the amount invested. That is why the first question should not be, “How much will I make from this?” but rather, “Who am I entrusting my money to, and do I understand what I am investing in?”
Risk Is Not Just a Number
Another thing that needs to be properly understood before investing is your own attitude to risk. Every investor has a different level of experience and a different ability to accept fluctuations in the value of an investment. On paper, a certain level of decline may look acceptable. But when someone actually sees the value of their money falling, they may react very differently. If they are not prepared for such a situation, fear may lead them to sell the investment at precisely the wrong moment. When making an investment decision, it is therefore important to consider not only the return an investor expects, but also the level of decline they are able to accept both psychologically and financially.
Investing on Your Own or With a Professional?
Today, practically anyone can invest independently. For an experienced person who understands financial markets, knows how to verify information and is able to manage risk, this can be a natural approach. For a beginner, however, it can be useful to have someone alongside them who can explain how different investment instruments work before they decide which one to choose. In my view, before making an investment decision, every investor should first be clear about why they want to invest, how long their funds can remain invested, what experience they have with investing and how they perceive the associated risks. When working with clients, we therefore focus not only on the investment instruments themselves, but also on ensuring that clients understand their characteristics, risks and other important parameters. We also discuss how the client might feel if the value of their investment were to fall temporarily. This is not to discourage them from investing, but to ensure that they understand the risks associated with the investment instruments they are considering and can make an informed decision based on their own judgement. In my view, this aspect is often underestimated. An investment may look good on paper, but if an investor becomes uncertain at the first significant downturn and decides to withdraw their money out of fear, they may seriously disrupt their long–term plan. That is why I consider it important for clients to understand the potential fluctuations in the value of their investment before making a decision. The main purpose of such a discussion is to ensure that, before making an investment decision, the client has sufficient clear and understandable information and understands the key characteristics and risks of the investment instruments being considered. The final investment decision always rests with the client. The role of an investment intermediary’s representative is to provide clear and understandable information about the investment instruments that may be arranged as part of the investment service provided, including their key parameters, risks, costs and liquidity, so that the client can make a decision based on their own judgement. Investing is a long–term process in which time, regularity, diversification and risk all play a role – and, above all, so does understanding what you are investing your money in.
Tomáš Mrajca, ROYAL VISION s.r.o.
This article is intended for general informational and educational purposes only and does not constitute investment advice or an individualised investment recommendation. Warning: Investments in financial instruments involve risk, including the risk of losing part or all of the amount invested. The value of an investment may fluctuate and the return of the invested funds is not guaranteed. Past performance is not a reliable indicator of future performance.
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Tomáš Mrajca works for ROYAL VISION s.r.o., Company ID No. 28322584, which is part of the DRFG Group and acts as a tied agent of the investment intermediary EFEKTA Brokerpool a.s., Company ID No. 29048770, registered in the list of regulated and registered entities maintained by the Czech National Bank (www. cnb.cz). The company intermediates investment instruments, insurance and other financial products, including products of the DRFG Group, and receives remuneration for arranging them.