This is a list of a few things you might need to consider after deciding to invest.
This is the main reason for investments. This is one of the foremost considerations that goes into determining what, where and how to invest. The return you can potentially get is a crucial aspect. However, to make a successful investment decision, you need to consider more than the potential for gain. You must also consider the potential for loss.
When evaluating an investment, look at the annual rate of return. This is the percentage of increase or decrease in the investment’s value each year. It will give you a better idea of how much money you can expect from an investment over a given period.
You can find this information from your financial advisor who should be able to tell you what kind of annual return you can expect from various investments. You can also check the historical return on stocks, bonds, mutual funds, and other investment types through free sites like Google Finance.
There is no risk-free investment. Even government securities have risks attached to them and so do savings accounts. Every potential gain has a potential risk. To know the right allocation strategy for you, you need to understand your tolerance for risk.
If temporary losses keep you awake at night, concentrate on lower-risk options like bonds. If you can weather setbacks in the pursuit of aggressive long-term growth, go for higher risk options like stocks.
It is important to note that one of the most important factors that increase the risk of an investment is the investor’s temperament. Study after study has found that the secret to successful investing is learning to manage your emotions. You should not lose sleep over daily market fluctuations or react dramatically to bad news about the economy.
To get a bit of insight on the type of investor you are and some of the investments that would be right for you, here are some of the questions you can answer:
Other than keeping our emotions in check, the other way to keep investment risk at bay is understanding the importance of diversification. Diversification involves spreading your money among different types of investments to help cushion the blow of losses.
Have investment goals before you begin to invest. What do you want to accomplish with your investments? Additionally, goals go hand-in-hand with safety. Safety refers to how conservative your investments will be and how likely you are to lose your original investment.
If you are investing to have an income then you need to pick stocks and mutual funds which offer a consistent profit over a long term period. Growth is also another direction you may want to go. This is when the goal of your investment portfolio is long term investment which carries more risk, less safety, and provides no dividends.
Knowledge in investing can be an asset but more often than not it is a limitation since it closes you out to potential opportunities due to the lack of awareness of how to invest or that they even exist. Therefore, your knowledge on assets and asset allocation is instrumental in choosing investments.
There are 2 broad classes of assets. Traditional assets include stocks, bonds, and cash, while alternative assets are everything else, including commodities, real estate, foreign currency, art, collectibles, derivatives, venture capital, special insurance products, and private equity.
Most individual investors will find that a combination of stocks and bonds, plus a cash cushion, is ideal. Everything else requires highly specialized knowledge. If you're an expert on antique Chinese porcelains or classic cars, go for it. If you're not, you're better off sticking with the basics.
The ability to invest and withdraw funds at any moment is on a lot of investors surprisingly don’t consider. Rushing to invest in a friend’s company or land are just 2 common examples. You are so caught up in the excitement of the investment that a lot of caution is thrown out the window.
As an investor, you might need the flexibility to invest or withdraw at any time depending on your situation, time horizons and goals.
At what stage you are in life, how long you want to invest and how long you have left with a steady income are all important considerations when choosing the right investments.
For some investments to truly work, you will need to commit to a period of time during which you will leave those investments untouched where a reasonable rate of return can be expected only with a long-term horizon. A good example of this is real estate. When investments have a long time to appreciate, they’re more likely to weather the inevitable ups and downs of the market.
Another important reason to leave your investments untouched for several years is to take advantage of compounding. When you start earning money on the money your investments have already earned, you’re experiencing compound growth.
Financial planning of any kind is an excellent idea before you start investing.
It would be of great help to have a budget in place, which will help you free up more cash by eliminating inefficiencies in spending as well as determine how much money you need to invest. You can also use your budget to see how much your investments might grow over time and the potential impact of inflation on your savings.
As an investor, you can take advantage of volatility by including in your portfolio asset categories with investment returns that move up and down under different market conditions. Market conditions that cause one asset category to do well often cause another asset category to have average or poor returns. By investing in more than one asset category, you'll reduce the risk that you'll lose money and your portfolio's overall investment returns will have a smoother ride. If one asset category's investment return falls, you'll be in a position to counteract your losses in that asset category with better investment returns in another asset category.
This is one of the aspects that will be covered with proper diversification.
Taxes should also be considered when making investment decisions since different types of investments are taxed at different rates. For example, capital gains taxes are incurred when you sell assets for more money than you bought them while you could enjoy tax benefits with retirement benefit schemes as well as government securities. Be sure to speak with your financial advisor about the tax implications of any investment before you decide.
It is also important to note, that with any transaction you make with an institutional intermediary, like a stock broker or insurance agent for instance, there are fees and commissions that accrue. Therefore, activities like day trading that involve many transactions in a short period can kill your returns.
In conclusion, I would like to point out 2 things: firstly, that as an investor, none of the factors mentioned above are good or bad. Concepts like volatility, taxes, fees and risk are not bad or good, they are just concepts you need to be aware of. They are facts of life. The more you learn about them, the less fear they should elicit. Learn to work with them and you may find that they may be friends of your portfolio and not enemies of returns.
Secondly, whatever mix of assets you have at your disposal, make sure that you make a choice and invest in something! Hoarding cash is not an option for investors because inflation erodes the real value of cash and it is worth less and less every year.