Ep1. What is Investment?

Definition of Investment

    When people hear “investment”, normally, in their mind, stocks, real estate, and other complex terms are popped up. Those thoughts make investment difficult and hesitate to invest. However, investment is in our daily life and is necessary thing for financial stability and development. Today, we will take a look a basic definition of investment, what makes investment important, and what we have to know about investment. I hope this post helps you to expand your perspective about investment and take one more step for financial stability.

▪️ What is investment?

    The definition of investment is an action to purchase asset or put capital to gain more profit using current resources. Resources in here means not just money, but time, knowledge, effort, and other various types of things. Also, the range of assets to invest is wide including stock, bonds, real estate and education. You can choose each assets based on your investment goals and situations. A basic goal of investment is to increase value of the assets and earn profit. Investors might prepare future uncertainty and expect long-term financial stability and growth through investment. Investment is not only increase your property, but also plan your future and make a decision for your better future.

▪️ Importance of investment

    I’ll show you 3 perspectives why investment is important. First, let’s consider financial stability. Long-term investment provides foundation for stable financial status. For example, investment is necessary to achieve goals including preparing retirement, purchasing house, and securing education fee for children.

    Next is compound effect, the greatest advantage of investment. Compound is a phenomenon that principal and interest increase together as the time passes. This effect provides opportunities to grow early investment capital and earn more profits in a long term. Therefore, it is important to invest as early as possible.

    Finally, investment offers you to offset inflation effect. Inflation shows decreasing purchasing power as the time passes. Even though the inflation makes your capital’s real value decrease, appropriate investment can offset decreasing purchasing power and protect real value of your assets.

▪️ Risk management related to investment

    Investment always comes together with risks, and not managing those risks brings financial losses.

    The first risk is volatility of stock markets. The markets change anytime, and price fluctuation is normal. It is important to understand the volatility and rebalance your investment portfolio.

    Second, credit risk happens when debtors make default. This is one of main risks when you invest in bonds. Investors have to assess credit rates of companies and make proper decision.

    The last one is real estate risk related to economy cycle. Real estate market is connected closely to economy cycle, and you have to respond correctly against the cycle. 

    To manage those risks, diversifying your portfolio is important. You can secure stability to invest various asset classes and diversify the risks. Additionally, you have to keep in mind to rebalance your portfolio regularly to respond appropriately against the market movement.

▪️ Understanding mental components related to investment

    You have to acknowledge that emotion affects your investment decisions. Unless you are an AI or an investment machine, you are just a human who is influenced by emotion and other people’s behaviors.

    Fear about market volatility is an issue that many investors confront. Stock markets can fluctuate any time, and increase and decrease of the price cause investors’ determination to be shattered. You need to understand the fear and prevent it not to affect your investment decision.

    Also, greed can affect you. Seeking too much profits or taking too much risks might lead to losses. You should restrain your greed and make a careful decision.

    Another psychological effect is herding effect, which can bring market melt-up or collapse. Maintaining your perspective and not being affected by others’ behaviors is required.

    Understanding and managing mental components, you can determine logical and balanced investment actions. This leads you to achieve financial goals by structuring stable tactics.

▪️ Differences between long-term and short-term investment

    Those two approaches have lots of differences in investment goals and methods. Those have each unique features and are chosen by according to investors’ goals and risk tolerance.

    Long-term investment targets increasing value of assets as the time passes. Usually investors who have long-term financial goals take this approach, and therefore it is less volatile to short-term fluctuation of markets. It is also proper to investors who want to hold assets long. For example, you can choose long-term investments if you are going to plan your retirement and secure financial stability.

    On the other hand, short-term investment targets temporary and quick profits. It uses short-term volatility to achieve target return, so experienced traders choose it. This approach also uses systematic approach to find the best timing for their return.

    It is important to understand each approaches’ pros and cons and choose based on your investment preferences. In addition, you can blend long and short-term approach to consider the portfolio in multiple ways.

▪️ Tax

    There are various kinds of taxes related to investment, including profit tax, capital gain tax, dividend tax and others. Tax is expense of investments, so you should consider which tax strategy is profitable. 

    The first tax is profit tax. It taxes a certain tax rate according to a type of asset and holding period. Thus, you have to consider which asset to invest and how long to hold it.

    The second is capital gain, which is tax for profit you earn after selling. It also differs according to holding period, and there is tax exempt policy for a certain asset.

    The last one is taxed based on a type of account. Some accounts are tax-exempt or tax-differed. If you use them, you can lower tax expenses in a long term.

    Tax policies related to investment is complicated, so I recommend you to ask advice to experts. It will help you to make efficient tax management strategy and protect your profit.

▪️ Finding investment opportunities.

    You have to consider various asset class to expand investment opportunities not just stocks and bonds. For instance, real estate provides stable rental income and increasing value of the property. Investing in art pieces also gives you profit using market growth and value of the pieces. Recently, cryptocurrencies become blue ocean for new investment opportunities.

▪️ Ethics

    It becomes important concerns to understand ethical consideration in investment. It brings positive effects about ESG(Environment, Society, and Governance), and in a long view, stable profit.

    Environmental concern includes climate change, protecting ecosystems, and energy efficiency. Social concern considers social fairness, labor issue, and recruitment opportunities. Governance segment evaluates transparency of firms, ethical management, and members of BOD.

    Sustainable investment and investing on social responsibility is regarded as reflecting investors’ ethical value and achieving financial profit. This approach becomes popular among people who is socially responsible, and contributes positive social change and environment protection.

▪️ Patience for investments

    Investment requires patience. Markets like stock markets might show temporary price volatility, and it brings anxiety to investors. But in a long term, the stock markets tend to grow stable, and long-term investors expect positive return based on stability.

    Therefore, in the beginning of investment, you should control yourself not to overreact to short-term market movement. Instead, you must set long-term goal and be patient. Through this, you can maintain or even develop your portfolio. It also helps you to construct stable economic future.

    Investors should be educated continuously to achieve long-term goal. Investment market is complex and hard to project, so investors need to educate themselves to prepare difficulties and challenges. They have to do research for recent information and trend, take advices, and rebalance portfolios.

▪️ Technologies for investments

    Technology development makes groundbreaking changes about investment environment and provides new possibility to investment methods. You can utilize those techs for various advantages.

    First, online platforms and apps improve investors’ accessibility to information. Investors can check in-time data, news and advices conveniently. Using this, investors make decisions quickly and efficiently.

    Additionally, complex techs such as algorithm trading, AI, and big data analysis make investment decision more delicate. These help to analyze and project market trends, and optimize portfolios through manning risks. Plus, by constructing automatic investment strategies, investors can manage portfolios more efficiently.

    In a recent investment environment, knowledge and understanding about technologies is a core. Investors can make better decision by learning and utilizing them, and develop investment strategies. Therefore, investors should pay attention to technology development and find methods to adapt those in their investment approaches.

    Investment is not only earning profits, but also seeking financial stability and freedom. If you start investing with correct knowledge and strategies, investment helps you to achieve financial goals. I hope your odyssey to be successful, and brief information in this post would be mentioned in detail later. I wish you luck!