Simple, basic knowledge of Finance is a powerful tool.The purpose in becoming familiar with these fundamental investing concepts is to make people right decision in their investment decision-making process. Once people have the grasping way of operation, They will be able to take a more active, informed role in the direction of their portfolio, and ultimately their financial future.
Diversification: Simply, diversification means not putting all eggs in one basket. If one investment bottoms out, One haven’t lost everything.Since stocks respond differently to changes in the economy and the market place, a short-term decline in one can be balanced by others in Investor portfolio, which are currently stable or rising in value. The key, then, is not necessarily the number of assets that people own, but the tendency of those holdings to not move in concert with each other.
Asset Class Investing: Each basic asset class – stocks, bonds, and cash investments – has specific risk and return characteristics. Stocks can be grouped and evaluated according to their capitalization and whether they perform as growth or value assets.
For instance, small capitalization (small cap) companies are generally newer, faster growing organizations that consequently carry higher risk than larger capitalization
(largecap) companies, which tend to be more established, well-known, and have steadier streams of income and profits. Bonds are most commonly evaluated by their
length of maturity and quality of the borrower.
Asset Allocation: Asset allocation refers to the way investment funds are divided among the three basic asset classes – stocks, bonds, and cash investments – in order
to increase the expected risk-adjusted returns. The goal is to combine percentages of investments in different asset classes to maximize Investor portfolio’s growth for the
amount of risk that Investor is willing to take in that area. Asset allocation can also be applied to narrower segments of each of the basic classes. Stocks, for example, can
be further divided according to growth, value, small or large cap, domestic, or foreign. As a broad group, stocks have the highest average total return over the long run, but are usually the most volatile over a short period of time. Cash-equivalents are the least volatile, but have the lowest return. Bond volatility falls between the two.
Re balancing: The purpose of re balancing is to maintain the same percentages in the various asset classes in order to preserve proper diversification during all market conditions. Rebalancing is necessary because the inevitable up and down moves of the market invariably change allocation percentages. For example, some short-term gains might be forfeited by re-balancing Investor portfolio, but huge losses can also be avoided.
Power Of Compounding: Compounding is the process of earning interest on money that is invested, and reinvesting those earnings into the same investment. The concept is
that at the end of each year, interest is earned not only on Investor original principal,but also on all of the previously accumulated interest as well; in other words,earning interest on interest, which is a very powerful investment mechanism.
Time: Given enough time, investments which might otherwise seem of little value can become quite attractive. The longer the period of time Investor hold an investment, the closer the actual returns will approach the expected average. In other words, short-term fluctuations will even out. Analyses have shown that the trade-off between risk and reward is driven by time. With a long-term view, Investor better able to make investment choices, which have a greater chance for success
Diversification: Simply, diversification means not putting all eggs in one basket. If one investment bottoms out, One haven’t lost everything.Since stocks respond differently to changes in the economy and the market place, a short-term decline in one can be balanced by others in Investor portfolio, which are currently stable or rising in value. The key, then, is not necessarily the number of assets that people own, but the tendency of those holdings to not move in concert with each other.
Asset Class Investing: Each basic asset class – stocks, bonds, and cash investments – has specific risk and return characteristics. Stocks can be grouped and evaluated according to their capitalization and whether they perform as growth or value assets.
For instance, small capitalization (small cap) companies are generally newer, faster growing organizations that consequently carry higher risk than larger capitalization
(largecap) companies, which tend to be more established, well-known, and have steadier streams of income and profits. Bonds are most commonly evaluated by their
length of maturity and quality of the borrower.
Asset Allocation: Asset allocation refers to the way investment funds are divided among the three basic asset classes – stocks, bonds, and cash investments – in order
to increase the expected risk-adjusted returns. The goal is to combine percentages of investments in different asset classes to maximize Investor portfolio’s growth for the
amount of risk that Investor is willing to take in that area. Asset allocation can also be applied to narrower segments of each of the basic classes. Stocks, for example, can
be further divided according to growth, value, small or large cap, domestic, or foreign. As a broad group, stocks have the highest average total return over the long run, but are usually the most volatile over a short period of time. Cash-equivalents are the least volatile, but have the lowest return. Bond volatility falls between the two.
Re balancing: The purpose of re balancing is to maintain the same percentages in the various asset classes in order to preserve proper diversification during all market conditions. Rebalancing is necessary because the inevitable up and down moves of the market invariably change allocation percentages. For example, some short-term gains might be forfeited by re-balancing Investor portfolio, but huge losses can also be avoided.
Power Of Compounding: Compounding is the process of earning interest on money that is invested, and reinvesting those earnings into the same investment. The concept is
that at the end of each year, interest is earned not only on Investor original principal,but also on all of the previously accumulated interest as well; in other words,earning interest on interest, which is a very powerful investment mechanism.
Time: Given enough time, investments which might otherwise seem of little value can become quite attractive. The longer the period of time Investor hold an investment, the closer the actual returns will approach the expected average. In other words, short-term fluctuations will even out. Analyses have shown that the trade-off between risk and reward is driven by time. With a long-term view, Investor better able to make investment choices, which have a greater chance for success
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