Investment Decisions Are Based On Your Personal Situation
Investment decisions are usually tied to the investor’s risk tolerance and life stage.
Setting financial goals of specific amounts of cash required in each period, helps to ensure that targets are met.
Common goals include paying off student loans, accumulating funds for retirement or saving for your children’s education.
For each of these financial goals you need to work out how much money you need and when you need the money.
There are generally three basic objectives of investment namely income, growth and security.
Investors with income oriented goals are more concerned about current income than capital appreciation.
For those who are nearing retirement this becomes an increasing need.
Products that offer regular returns, like fixed deposits, corporate and government bonds are commonly used portfolios or individuals seeking income above the market average, carry higher rates and can be more volatile than the general market is.
High interest bonds, and high dividend stocks, will be the main components for investors with growth oriented goals.
They must recognize and accept the risks inherent in investments of this type. Many of these types of bonds are called “junk bonds”.
Growth investments typically generate little or no current income.
Some investments are more volatile than others which can lead to substantial and rapid changes in gains and losses and the value of the account.
Finally investors with security oriented goals are concerned with capital preservation and tend to place greater emphasis on diversifying their portfolio in order to reduce risk and at the same time, maintain their purchasing power.
They tend to go for investments that guarantee the principal invested as well as returns.
While no investment option is completely safe, there are new safe products such as fixed deposits savings accounts, government bonds and very high quality fixed income investments available.
People who are inclined to want these types of investments are usually very risk adverse, very wealthy or those who need security in their investments.
For instance if you’re saving for a major but short term financial goal, like paying college tuition, you might be less inclined to put your entire portfolio at risk.
An investment horizon refers to the amount of time you have to invest so as to achieve your financial goals.
A longer investment horizon allows you more time to ride out short term price fluctuations on your investments.
Furthermore the longer the investment horizon you have, the more time you also have to grow your savings through compounding returns.
Compounding is about earning interest upon interest.
That is the returns on previous returns.
This means that earnings that you earn are reinvested and thereby increase the amount upon which more earnings are generated.
So if you start investing early your investments will be able to compound over a longer period of time.
The earliest returns are reinvested for the longest time and therefore generate greater returns.
Generally the shorter the investment horizon you have, the lower the risk you can bear. If you cannot afford to lose money you should only invest in less risky assets, especially if you have a short investment horizon.
This means that if you need your money in a short time you cannot take chances with your capital.
You should invest in assets that do not put your capital at risk during that period.
So the lesson here is start investing early and that will help increase your chances of meeting your financial goals, your risk return profile and investment horizon.
If you are early in your career and you tend to have a small net worth due to your liabilities, such as current house loans, your priorities on home and probably children’s education. Then you need to think carefully about your investment choices.
Either way consider your unique situation and how that relates to the way that you will invest over the near and long term.