What is investing?

Financial planning is a systematic approach by which you get to maximize your existing financial resources by utilizing several financial tools to achieve your financial goals.

Investing is an essential and indispensible element of financial planning. Broadly, it means making your money grow or appreciate to fulfill long term financial goals. It is a way of saving your money to meet your financial plans - children's education, retirement to purchasing your own home etc. In simple words, investing means making your idle money work for you.

There are different ways of making an investment. It includes placing money into stocks, bonds, mutual funds, real estate or even starting an enterprise. These options are referred to as 'investment vehicles'.

Investments have a risk-reward spectrum. In accordance to your financial plans, you may invest in instruments with compatible risk and return ratios. As a general rule of thumb, higher the risk an investor takes on an investment, the greater potential returns he/she stands to make and vice versa. The focus is on returns and the spectrum, in terms of risk, runs from conservative to very aggressive. One way to measure results is by weighing expected returns against anticipated risks.

Along the risk-reward spectrum, investments can be classified into three basic categories: cash, bonds and stocks. Each category has its own set of characteristics and plays an important role in structuring a sound investment portfolio.

 

Time in the market

Investing in the stock market does not depend on timing the market, but time in the market. Stock prices fluctuate on a day-to-day basis, sometimes drastically. That's the nature of the stock market. While past performance does not guarantee future results, history has shown that, over a longer term, stock market investing has been rewarding.

Long-term investing does not have to span a period of 50 years. Even five years can make a big difference. Long-term investing in the stock market pays off quite generously too.

It is known that trying to time the market is next to impossible. Timing the market is basically the strategy of buying and selling financial instruments (most often stocks) by attempting to predict future market price movements. It's better to stay fully invested during all market cycles. This has, historically, given investors the greatest average return by comparison. Hence, it's time in the market that's important, not timing the market.