Golden Rules of Investment
Before we proceed lets revise the meaning of words viz., rules and investment in context of this article.
- Rules are sets of certain principles or conditions that guide, direct, refine, control, and govern something or someone.
- Investment is a continuous course of action(s), for exploring the various fiscal alternatives to maximize the wealth.
Golden rules of investment used for its evaluation are depicted below.
The main principles or golden rules of investment are as follows:
- Growth is an appreciation or raise or an increase in the market value of the investment.
- Returns mean an increase in the revenue or income earning capacity of an investment.
- Liquidity is the realized value or sale value of the investment made as on today.
Now let's briefly discuss each golden rule of investment.
Growth is an appreciation or raise or an increase in the market value of the investment.
An increase in the value is one of the positive factors of a good investment.
While evaluating the growth of an investment, following points shall be considered.:
- Growth can be measured in terms of an increase in the market value of the principal amount invested. That is, an increase in the initial investment made.
- It can also be measured in terms of market demand or market analysis for the investment.
Return on an investment is the revenue or income earning capacity of it.
Investment needs to be categorized based on its high revenue earning capacity, stable revenue earning capacity, and low or nil revenue earning capacity.
While categorizing investment on its revenue earning capacity principle of return is to be kept in mind.
According to the principle of return on an investment,
High returns will carry a higher risk, and low returns will carry a lower risk.
In other words, above principle states that any investment giving maximum returns is generally very risky and the one that gives minimum returns is usually safer and bears less risk.
Following points are considered while evaluating returns on an investment:
- Returns can be measured in terms of an increase in the earning capacity of the investment made.
- It can also be measured in terms of future commitment made to the investor.
Liquidity is the realized value or sale value of the investment made as on today.
Liquidity is the amount of sale-considerations for an investment, provided sold as on today.
Higher sale consideration over the investment made will be considered for its evaluation.
To evaluate liquidity of an investment, following points shall be considered.:
- Liquidity can be measured in terms of realized value after the sale of an investment.
- It can also be measured if the demand is more for the investment, and supply for the same investment is short.
Evaluating an investment
For instance, consider following discussion to understand how to apply golden rules of investment to evaluate and test your investment.
Lets assume, you have initially invested $10,000 in some XYZ investment scheme, plan, policy, project, venture, etc.
Now you are interested to find out, where your investment decision is based on the golden rules or not. For this, you must first evaluate your investing decision by finding valuable answers of the following three important questions:
- (Q.1) What is the difference between the current market value of XYZ investment (as of today) when compared with the starting or initial investment made? ($10,000).
- Answer: If the present market value of XYZ investment is more than $10,000 (actual amount initially invested), then you can conclude that your investment is showing growth and vice-versa.
- (Q.2) What is the income or revenue generating capacity of XYZ investment?
- Answer: Here, you must check whether XYZ investment is giving a high return / stable return / low or nil return. The categorization of it must be done based on the percentage of returns. That is, high percentage of income or revenue earned by it implies higher return and vice-versa.
- (Q.3) What value (amount) XYZ investment will fetch if it is realized or sold today in the market?
- Answer: Here, you must test whether the XYZ investment can be easily realized or sold in the market or not. If it is sold in the market today, then what value or amount, it will fetch must also be found out. High realized or sale value of it will imply that it is highly-liquid and vice-versa.
Once you have successfully evaluated XYZ-investment based on your ready answers collected with respect to the above three questions then you can proceed further to compare them with investment-decision given in the following table.
The three golden rules of investment viz., Growth, Returns and Liquidity can be applied to any type of investment.
If these rules are applied wisely and with due care, then an investor can never let his or her investment go bad.
From above discussion, following conclusion can be derived:
- The above discussed parameters / conditions / rules can be applied to any type of investment.
- The golden rules help to test, verify and conclude whether the investment decision is a good (right) one or bad (wrong) one.
- These parameters need to be evaluated properly and promptly right from the introductory stage of the selection of an investment, and also used later at regular intervals once investment is being made.
- This evaluation process based on the golden rules of investment overall helps an investor to determine the efficiency and status of his investment.
- Such a constant review will help an investor to avoid the risk attached to his investments.
- Furthermore, this will also help an investor to explore the new opportunities to maximize the income earning capability of the invested funds.
- If evaluation is done properly and regularly, then no investment will ever turn into a bad one.