This is How the Most Common Investments Work

The best way to grow your wealth is with a diversified portfolio. A well-diversified portfolio includes various conservative and aggressive investments. 

Avoiding putting all money in one investment ensures you can offset the risk of a specific investment.

Having a diversified portfolio helps you grow your wealth and reach financial goals.

Whether you’re saving for something short-term, such as buying a house, or want to secure your retirement years, holding various investments in your portfolio increases your chances of reaching your goals.

The Factors Affecting Investments

Many factors affect your chosen investments and help determine what to include in your portfolio.

The largest factor is your risk profile, or how much risk you can handle. 

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risk management conceptYour risk aversion measures how much risk you can psychologically handle without feeling crippled physically and emotionally.

Your risk capacity refers to how much money you can lose without ruining your financial goals.

Typically, shorter-term goals have lower risk capacity than longer-term goals because there's more time to make up for the loss.

Other factors affecting the investments you choose include:

  • Minimum investment requirements
  • Rate of return
  • Fees and commissions
  • Knowledge of how the investment works
  • Timeline
Time is money

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time is moneyAnother large factor in choosing the right investments is time.

The more time you have, the more likely your earnings will compound.

For example, the money you put in a savings account that earns interest continues earning interest, compounding your earnings as long as you leave it there. Your earnings earn money; it doesn't get much better than that!

The same is true of other investments that don't earn interest, like dividend-paying stocks.

If you reinvest the dividends, your interest earns interest. This means your earnings grow just by leaving them invested.

On the other hand, time can play against you, if you don’t invest your money, your money will lose value, meaning that you won’t be able to buy the same amount of things with the same amount of money in the future. This effect is called inflation, and we have to fight by investing in instruments with higher rates than inflation.

Liquidity

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