The aim of investing in any kind of business is to make profit and anything contrary to that is unacceptable to entrepreneurs.
One way to ensure that a business keeps growing is investing wisely and according to experts, this involves certain characteristics that an investor needs to have in order to build wealth.
Business analysts say an entrepreneur begins to build wealth when passive income reaches a point where it can give financial independence.
Entrepreneur and author, Joshua Kennon, says one step to investing wisely is for an investor to do what works for him.
He also highlights other rules for reinvestment, and they include:
Never owning something you don’t understand
According to Kennon, for an investor to avoid financial heartache, he must not buy or hold anything he cannot explain in simple terms such as how it can generate money, what its potential pitfalls, and how that money found its way into his hands.
He adds, “Do you know the difference between a share of stock and a master limited partnership unit? No? Then don’t buy MLPs through your broker. They look like stocks, trade like stocks, but are most definitely not stocks. You can be in for an unpleasant tax surprise if you start collecting them without knowing what you’re doing.
“Do you know how preferred stock differs from common stock and corporate bonds? No? Then don’t buy them. The same goes for everything from convertible shares to real estate investment trusts. There’s plenty of time to learn about these securities and you can always buy them later.”
Protect yourself against the downside by proactively managing risk
Kennon says risk is ever-present but that managing money and investing wisely require an investor to respect it while simultaneously reducing it.
He adds that if an entrepreneur fails to reduce risks a lifetime of savings may be compromised.
“There are the three types of investment risk, there’s liquidity risk, there’s inflation risk, there’s market risk, counter-party risk, fraud risk. On and on it goes. This is one of the reasons it is so important to focus not on absolute returns, but on risk-adjusted returns; to actively, constantly, strive to reduce risk,” he says.
Take advantage of the power of compound interest as early as possible
Experts say investing wisely means harnessing the power of compound interest. According to them, the earlier an entrepreneur starts, the easier it is to amass a good net worth.
Kennon says if an entrepreneur wants to know how to get rich, the secret is either to put a lot of money to work, let it work for a long period of time, or both.
According to experts, the more an entrepreneur can save on taxes, the more money he will have working for him. They add that every entrepreneur must learn how to take advantage of deferred tax liabilities, but should avoid cheating on taxes.
Control your expenses
Experts posit that cutting expenses, for many entrepreneurs is easier said than done. According to them, cutting costs is the quickest and easiest way to improve the profitability of a business and every plan aimed at cost cutting should be strictly adhered to.
They add that entrepreneurs should start by identifying their major cost centres which may be purchasing, production, sales and marketing, finance and administration, and assess their profit and loss statement for at least the last six months and rank all expenses from highest to lowest then start working their way down, identifying areas where to save costs.