It’s best to start saving and investing as soon as you start earning money, as the discipline and skills you learn will benefit you for the rest of your life. No matter how old you are when you start thinking seriously about saving and investing, it’s never too late to begin.
Keys to creating a sound investment strategy:
START INVESTING NOW
TIME IS YOUR FRIEND compounding can be huge!
HIGH COSTS ARE A DRAG ON PROFITS avoid them
DIVERSIFY, DIVERSIFY, DIVERSIFY
MANAGE ASSET ALLOCATION CAREFULLY
People who establish plans are more likely to engage in behaviors that help them achieve their goals. To ensure you experience the kind of retirement you desire, you need proper financial and lifestyle planning.
· Retirement planning should not be focused solely on money.
· Figure out in advance what you want out of retirement.
· Financial freedom provides more choices throughout life, including during your retirement years
Investment Considerations
Everyone has different financial goals with differing priorities, hence individual investment choices will vary. No matter what your individual goals are, many of the same factors are involved in making the best decision for your own particular situation.
Time Horizon
An important consideration when investing is how long you have before you will need to get the money you are investing back. The longer you have before you want to spend your money, the more aggressive you can be in investing it. Investments which focus on stocks, such as Mutual Funds, can be a valuable component of a portfolio with a long-time horizon. By contrast, if you only have a short time frame before you will need your money back, conservative options which offer easy access to your money may be the best option.
Money Available for Investments
Having a diversified portfolio is an important way to reduce risk. However, if you have a limited amount of money to invest, then putting together a well-diversified portfolio can be difficult. It’s impossible to identify in advance which asset classes will lead the way during any given time, hence it’s wisest to spread your funds among several investment classes. Diversification reduces risk while at the same time maintaining or even improving portfolio performance. New investments should only be made after assessing your current financial position. All investments should be considered when making investment decisions, to ensure that your strategy is aligned and will help you achieve your objectives.
Rate of Interest
Consider the interest rates offered by Financial institutions, the higher the current rate of interest the greater the level of savings will be. However, if the rate of savings is low consider investing as the cost of borrowing will be low.
Risk Tolerance
Risk tolerance is the extent to which you as an investor are comfortable with the risk of losing money on an investment. If you’re unwilling to take the chance that an investment that might drop in price, you have little or no risk tolerance. One of the most important factors in choosing appropriate investments is knowing how comfortable you are with taking on the risk of investing. Certain types of investments see larger changes in their value than others. It’s important to be able to stick with an investing plan and tailor an investment strategy that’s best for you and meet’s your risk tolerance. The probable consequence of limiting investment risk is that you are vulnerable to inflation risk, or loss of buying power.
Political Stability
In the event that the economy is filled with political up havens this will cause levels of economic instability and would have adverse effects on investor confidence within the economic environment. Hence it is important to keep abreast with the political decisions made in the economy to determine when is the right time to invest for the greatest return on investment.
Investment Categories
Lending Investments
Lending investments allow you to be the bank. They tend to be lower risk than ownership investments and return less as a result.
Savings Account
Even if you have nothing but a regular savings account, you cannot call yourself an investor. You are essentially lending money to the bank, which it will dole out in the form of loans. The return is minimal, but there is little to no risk as your funds are covered by the Deposit Insurance Corporation (DIC) up to $125,000
Business
The money put into starting and running a business is an investment. Entrepreneurship is one of the more difficult investments to make because it requires more than just money. Consequently, it is also an ownership investment with extremely large potential returns. By creating a product or service and selling it to people who want it, entrepreneurs can potentially make huge personal fortunes.
Cash Equivalents
These are investments that are easy to convert back into cash.
Investing for life stages
Although everyone’s attitude toward investing and money is different, most investors share some common situations throughout their lives. For instance, where you are in your life cycle certainly affects how you invest for retirement, but what about other life stages that aren’t so closely related to age?
When you get your first “real” job:
- Start a savings account to build a cash reserve
- Start a retirement fund and make regular monthly contributions, no matter how small
When you get a raise:
- Increase your contribution to your company-sponsored retirement plan
- Invest after-tax dollars
- Increase your cash reserves
When you get married:
- Determine your new investment contributions and allocations, taking into account your combined income and expenses
When you want to buy your first house:
- Invest some of your non-retirement savings in a short-term investment specifically for funding your down payment, closing, and moving costs.
When you have a baby:
- Increase your cash reserves
- Increase your life insurance
- Start a university fund
When you change jobs:
- Review your investment strategy and asset allocation to accommodate a new salary and a different benefits package
- Consider your distribution options for your company’s retirement savings or pension plan.
When all your children have moved out of the house:
- Boost your retirement savings contributions
When you reach 55:
- Review your retirement fund asset allocation to accommodate the shorter time frame for your investments
- Continue saving for retirement
When you retire:
- Carefully study the options you may have for taking money from your company retirement plan. Discuss your alternatives with your financial advisor.
- Review your combined potential income after retirement and reallocate your investments to provide the income you need while still providing for some growth in capital to help beat inflation and fund your later years.
Bonds
Investopedia defines a bond as a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer. Bonds encompass a wide variety of investments. The risks and returns vary widely between the different types of bonds, but lending investments pose a lower risk and provide a lower return than ownership investments.
Real Estate
Houses, apartments or other properties that you buy to rent out or repair and resell are investments. The house you live in, however, is a different matter because it is filling a basic need. The house you live in fills your need for shelter and, although it may appreciate over time, it shouldn’t be purchased with an expectation of profit.
Money Market Funds
With money market funds, the return is low, and the risks are also relatively low. Money market funds are more liquid than other investments, meaning you have continuous access to the funds.