Investment Basics
Saving is about protecting your wealth; investing is about growing it. In an age of inflation, not investing is itself a risk.
1. Risk vs Return
This is the most fundamental law of investing: higher returns usually come with higher risk, and lower risk usually means lower returns.
- Low risk / low return: bank deposits, government bonds, money market funds.
- Medium risk / medium return: corporate bonds, index funds, blue-chip stocks.
- High risk / high return: growth stocks, cryptocurrency, futures, options.
2. Diversification
As the saying goes: “Do not put all your eggs in one basket.”
By allocating across different types of assets (such as stocks, bonds, real estate, and gold), you can reduce the volatility of your overall portfolio. When the stock market falls, bonds or gold may rise, offsetting your losses.
3. Time and Compounding
Investing is a marathon, not a sprint. Time is investing’s best friend.
1. Stocks
They represent part ownership of a company.
- Source of return: price appreciation (capital gains) and dividends.
- Risk: poor company performance, market volatility.
2. Bonds
You lend money to a government or company, which promises to pay interest regularly and return the principal at maturity.
- Source of return: interest.
- Risk: default risk (the borrower cannot repay), interest rate risk.
3. Funds
A basket of stocks or bonds managed by professional managers.
- Active funds: try to beat the market, and charge higher fees.
- Index funds (ETF): track a market index (such as the CSI 300 or the S&P 500), charge low fees, and often outperform active funds over the long run.
4. Real Estate
- Source of return: rent and price appreciation.
- Characteristics: a high entry threshold and poor liquidity, but leverage is available (a mortgage).
Definition
A definition is a precise description of what a concept, a term, or an object means. Understanding definitions is the foundation of learning any field, and every concept has its own exact meaning.
Investing a fixed amount in a particular asset at fixed intervals (such as every month), regardless of whether the market rises or falls.
Advantages:
- No timing required: you do not have to guess where the bottom of the market is.
- Lower average cost: you buy more shares when the price is low and fewer when it is high.
- Discipline: it helps you overcome greed and fear.
The best time was ten years ago; the second best time is now.
Even if you only have 100 yuan, you can start buying funds. What matters is building the mindset and the habit of investing, not how much capital you start with.
Investing is the study of probabilities. Nobody can predict the future, but with sensible asset allocation and long-term persistence, you have a good chance of earning a satisfactory return.
Terms Used in This Article
| English Term | Explanation |
|---|---|
| Risk | The possibility of losing money on an investment |
| Return | The payoff you get from an investment |
| Diversification | Spreading investments in order to reduce risk |
| Dollar Cost Averaging | Investing a fixed amount at regular intervals |
| Index Fund | A fund that tracks a specific market index |