Trying to make the right investment decisions when faced with almost limitless options can be overwhelming. From stocks to bonds to property, there are many investment options to choose from. How exactly do you decide where and when to invest?
Here are a few important factors that can help you make better investment decisions and ensure that your money works for you.
Investment planning begins with a purpose or vision. It is useful to take your time to decide what your final goals are and why you’re investing. For example, are you investing just to preserve your money’s value because you might need it in the future? or do you want to make extra money fast because you need it for something soon?
Answering questions like these can help you recognise the amount of risk you are willing to take with your investments. You will also be able to identify the investments that are compatible with your goals.
When you need your money back
Before investing, it is useful to think about how soon you want your cash back. Just like your goals, this will help you determine the amount of risk you are willing to take on your investments.
If you are investing for retirement (which is quite far off), you might not need your money any time soon. Consequently, you can afford to take more risks as you have enough time to recover from any downturn in your investment. You may then consider making riskier investments, such as stocks or mutual funds, on a long-term basis.
On the other hand, if you are investing for a short-term goal, meaning that you will be needing your money in a few years, then it makes more sense to invest in less risky instruments such as bonds.
Your overall appetite for risk
Before you decide where to invest your money, it might be useful to assess your overall appetite for risk first. We all have different levels of risk appetite. While one person can withstand volatile periods without panic selling their investment, another might have less appetite for risk and be more likely to liquidate or sell their investment at the first sign of trouble.
If you establish that you have a low risk appetite and that you cannot afford to lose your money, it makes sense to put your money into less risky investments. In addition to not losing your money, you are also likely to have peace of mind.
If you don’t like taking risks, you might be able to protect yourself from potential losses and improve the balance between risk and returns by diversifying your portfolio.
You can, for example, chose to invest in stocks, bonds and cash rather than just investing in one. It is unlikely that all three asset categories will perform poorly at the same time. By investing in all of them, you reduce the risk of losing money, as any losses in one asset category can be compensated by the gains in another.
Your age can have a significant impact on where you decide to invest. If you are relatively young, you can afford to take more risk. Not only do you have fewer responsibilities, you also have more time to recover from any losses that you might incur should the market fail you. Therefore, if you are young, you can take on risky investments that earn above average returns.
By investing when you’re young, you also have more time for compound interest to work its magic. Compound interest earns interest not just on your principal but also on your interest. This means that your money grows at a much faster rate over time.
At the other end of the scale, if you are older and fast approaching retirement, it makes much more sense to put money into safer investments to reduce the risk of losing any or all of it by the time you retire.
There is a wide range of investment options avaiable in the market today, including stocks, bonds, mutual funds, precious metals, property and even cryptocurrency.
To make a wise and informed decision, it is useful to have accurate, comprehensive and timely information about all of these investment options. You can accomplish this by regularly checking out top investment news sites which provide the latest news and updates on different types of investment. While doing your research, it’s also wise to take some time to familiarise yourself with common investment terminology.
You might also want to research how various investments work and generate returns. With this information, you can then decide which ones make the most sense for you to invest in.
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