Like learning how to swim or riding a bike, it reaches a point where theoretical “why” and “what” should be followed by practical ‘how’. What you have learnt will be made permanent when you put it in practice.
In the process of practising what you have learnt, you will develop yet more knowledge and skills that might have been missed during theoretical lessons.
Investing in shares is one of such skills requiring putting words into action, walking the talk. It is an exercise forming part of our broader financial planning. There are two ways which can be used to start the process: Invest the lumpsum in one or few companies, or invest on a regular basis for a prolonged period.
The former method of investing is possible where you have significant cash from either of the following sources; past savings, retirement funds, inheritance, liquidation of other assets, or any other legitimate windfall gains (lottery).
It is advisable to start small, study how the system works and develop your skills as well as assess your risk profile and emotional attitude in this game.
How do you feel when shares you have just bought plunge in price? Like swimming you start on the shallow end of the swimming pool, and then slowly you venture to the deeper end. If you find the game interesting and beneficial you can abandon the restricted swimming pool and go to the wider horizon ocean swimming.
The second method of investing in shares is where you make personal commitment to invest regularly in one or more companies. Apart from building your equity investment portfolio overtime, this strategy reduces the average cost of your share purchases.
Sometimes you will be buying when the market is up and sometimes when is down.
The law of averages will bring down your cost of investment.
The periodic investment strategy reduces the headache of trying to time the market, especially during the period of significant price volatility.
This method may also apply to someone with a lumpsum but decides to spread the purchases to reduce the average cost of investment. It is called “dollar cost average” in developed markets (presumably the name coming from America – dollar empire).
All in all choosing either way for getting started to invest in shares is the best way to horn your investment skills. You will start to view investment in shares and its associated risks in a different perspective.
As you become knowledgeable and experienced, what used to be perceived as risky becomes less and less risky.
Indeed “risk” could be one of the concepts which mean different things to different people.
That is why American Robert Kiyosaki insisted that being financially “uneducated is risky”.
That means investing in shares/stocks is not risky, but the risk comes when you do not understand what you are doing in the market.
In fact most market booms and busts occur when people pump funds into the market without adequate knowledge of what they are doing. Starting the process does not involve much capital.