In the second of two articles on the financial industry, Shatadru Roy Choudhury looks at how to go about devising an investment strategy



"I can calculate the motions of heavenly bodies, but not the movements of the stock market." Isaac Newton, after being caught in a stock market crash in 1768.

There can be little doubt that to accurately predict the performance of the world's money markets on a regular basis is a near impossibility. But there are lessons that can be learnt from the past that will help you minimize your risks while still making a profit.

One tip, which most analysts agree on, is that the secret to good investing lies in starting early. A leading financial advisor neatly proved this point using the following example.

If you invest $350 per month between the ages of 35 and 55, you will have $720,000 when you retire at 65 years of age. However, if you take the same situation but start and finish investing a decade earlier (i.e. from 25 to 45), you'll have a whooping $1.95 million at 65. While both scenarios assume a 10% annual rate of return, you earn an extra $1.23 million in the second scenario thanks to the way compound interest calculations work.

Making this much, of course, also depends on the investment decisions you take. While it is beyond the scope of this article to discuss the complex analyses investors perform before parting with their money, it is worth remembering that the markets value securities (i.e. stocks and bonds) based on their cash flows. If a company is making more money than what the market expects, the value of its stock will rise. By purchasing securities that are underpriced and selling them off once their value has risen, you should be able to make a profit.

One particular strategy, which many analysts advocate for first-time investors, is the "buy and hoard" approach. This involves investing in companies that are financially stable and sticking with them in the long-term. As America's stock markets have historically shown, this tactic can often earn a healthy 10% annual rate of return on investments. It should also protect you from the day-to-day fluctuations of the money markets that many speculators fall prey to.

You can also minimize risk by diversifying your portfolio of investments. By buying into several different markets and types of companies, you should be able to offset possible losses in one investment with potential gains in another. While this strategy won't protect you from a general market decline, it will act as a cushion in the event that the value of one of your securities takes a sharp downward plunge.

The final ingredient to good investing lies in knowing your own limits. If you find that time is a scarce commodity and can't keep up with the latest market information, it could be worthwhile buying into a mutual fund that does all your investing for you. Alternatively, if you find it stressful to keep up with the fast-pace nature of the stock market, investing in the quieter bond market could offer you a better deal, even though its returns tend to be lower. However you decide to invest, make sure you do so on your own terms and not the markets'.