Managing savings is a key point for the success of the family economy. Investing should not only be associated with speculation, but also with saving. It is essential that from a very young age we begin to think about how to earn money by investing in order to manage our savings in order to cover future capital needs: studies, real estate, vehicles, etc.
The first thing we must consider is our risk profile. Our own capacity to assume losses, as this is the first step in selecting the assets that best suit our needs. We should not invest all our money in something that today is worth 1, tomorrow 100 and the next day minus 100, if we are not willing to bear that level of losses.
In the same way, the time horizon of the investment is important, since perhaps the same investment is worth 100 after one month. We should study our ability to withstand the investment in losses and not dispose of that money while the investment lasts. This is essential to understand how to make money by investing.
In this way, if our objective is to save, our investment portfolio must be very diversified. So, in the event that things do not go as we expected in one sector, the profitability we lose in that sector is offset by that obtained in the rest. And little by little, over time, our investment will bear fruit until we reach our financial objectives.
Let’s take an example. If we have 10 and we want to buy a car that is worth 20 in 5 years, we will have to create an investment portfolio that is capable of giving us 100% of our investment in 5 years.
For this we will have to invest in rather risky assets to obtain this return. If in the first 2 years we have obtained a return of 70%, we will have to reduce the risk of our portfolio with the objective of obtaining 30% in the 3 years that is still left to our investment. Why would we do this if we can earn much more? Because in the same way, we can lose it.
The second question to how to make money investing should be what is the purpose of my investment? We must adjust our risk to our needs and not risk more than is necessary to meet our objectives. Greed is not a good friend of the investor. We have to be consistent when investing and avoid the euphoria of making profits that takes us away from our financial objective.