5 Reasons Why Research Is the Most Essential Part in Any Investment Plan
When it comes to investing, regardless of what strategy one employs, it’s a good idea to undertake a great deal of research before getting started. This research can give a proper understanding of investment goals and methods. Here are five reasons why research is the most essential part in any investment plan.
Research Allows for Proper Goal Setting
It’s important to have a goal before starting on any project. Investing is no different. Knowing how much money is necessary for financial independence or retirement is the first step in achieving it. Those who fail to research will not have the information that’s necessary to set proper goals. They may not save enough. On the other hand, they may not know when they’ve actually reached financial independence.
Research can also provide the information that investors need to change their goals over time. Perhaps living conditions have changed. Perhaps inflation has gone up and made each dollar effectively worth less. Those who have researched various outcomes will be more likely to make wise decisions when it comes time to reassess their goals.
Research Allows Investors to Understand Compounding Interest
It’s been said that the power of compound interest is the eighth wonder of the world. Researching can inform people as to how much money they can expect to earn off of their investments given a variety of variable parameters. A lack of understanding as to how compound interest works can cause investors to think that money compounds in a linear, rather than an exponential, fashion. This couldn’t be further from the truth.
Failure to understand the power of compound interest can lead people to invest in instruments that do not provide enough of a return. This can lead to a loss of purchasing power, even when a person decides to keep on saving money over a period of decades.
Research Provides Power
In addition to the power of compound interest, knowledge is power in its own right. Those who research effectively will know how to read financial statements. These statements can allow investors to pick out the best dividend paying stocks, as well as the best non-dividend stocks, for their particular station in life.
Research provides the power that’s necessary to make wise decisions related to what investments are best. It also provides the knowledge of the tax code that can allow individuals to cut their tax bills. Fewer dollars going to taxes means more money that can go toward investments. When these additional funds start to compound, the building of wealth can start to accelerate even more quickly.
Research Can Provide Confidence
When investors start to learn the ropes of the process of investing, it’s likely that they will be able to get a few quick financial wins. They can start to put their finances on autopilot, which will allow them to spend more time researching. This can lead to a virtuous cycle of success.
By using effective research strategies to achieve success on a small scale, the process can then be scaled up. The small wins will start to add up to a nice sum of money. Those who have a nice margin of success built up can then have to confidence to take a few more risks with a solid margin of error built in. This is definitely a good situation to find oneself in.
Research Can Help One Avoid Bad Investments
It can be hard to avoid investing in a company like Enron that by all accounts looks solid via the financial statements they provide. Most companies will not be quite so deceptive, however. They are required to provide investors with their numbers each quarter and year. Smart companies want to lure investors in, and providing accurate information will make them appear more trustworthy and more appropriate to receive investing dollars. These financial reports can provide the information that the knowledgeable investor needs to make educated investments.
Researching stocks and the companies that offer them is an important step to take. This is the best way to see undervalued stocks that can provide outsize returns over time. It is also a good way to see investments that will turn out to be real dogs. Growing revenues and profits are good signs even when an overall market downturn might cause a stock’s price to decline.
When it comes to setting up a solid investment plan, the ability to research is indispensable. Research can provide the knowledge and information that investors need to achieve their goals. They can then avoid the investments that can really contribute to a loss of capital while hopefully maximizing overall returns over time.