Making an investment can be a very exciting time, however there are many things to consider when deciding on what type of investment to put your money into. There are few steps you can follow to help you decide how to invest your money:
Work out your goals
The first part of making an investment is to work out your financial goals. It is important to consider your total financial position when deciding to invest and what to invest in. For example, if you have personal debt it may be better to use the funds available for investment towards paying off his debt.
When deciding on your goals It’s important to decide where you want to be in the future. These can include short-term Goals, Medium-term investments and Long-term investments. The goals you have will go along way in helping you decide what investments are best for you to achieve your goals.
Once you’ve decided on your goals, it’s important to set a time frame around these goals. For example your goal could be, I want to save for a holiday in two years time, for this holiday I require $5000. A good way to keep track of your goals is to list them all in a table or spreadsheet.
Once you have your goals and objectives it is then a matter of deciding on how you were going to work towards achieving these goals.
Decide on how much risk you are prepared to take
There is a risk reward trade off with every investment. The more risky the investment, the higher the potential return. For example, an investment into a term deposit may return a lower return but term deposits generally don’t fluctuate in Capital value. There are many factors that impact on a persons risk profile, these include age, investment experience, financial position, ability to accept investment losses and family position.
There are many ways financial planners are able to assess risk tolerance. The use of a risk profile questionnaire will help you decide on a level of risk you are comfortable with. It is a series of questions about your experience in investing and your reaction to certain market conditions. It is by no means an exact science but will help with discussions about certain investments and market conditions.
There are many different risk profiles that are used to manage risk. The risk profiles use diversification across different investment classes to help spread the risk or as is sometimes referred to as “not having all your eggs in one basket”. The very Conservative risk profile‘s use a high proportion of defensive assets (term deposits, government bonds and cash) as these investments generally do not fluctuate in capital value, however, they do have a steady income returns. This type of investment may be suitable for someone who does not react well if the markets are down and would potentially pull the money out if there was an investment loss. The high risk profiles have a high proportion invested in Australian shares, international shares and property. These types of investments are generally considered growth investments as the capital value fluctuates. There are times when investments will be negative. These investors may look at a market drop as an opportunity to purchase more investments at a cheap price.
Some examples of risk profiles include:
Choosing your investments
Once you’ve decided on your goals, time frames and level of risk it is then time to look at investments that may meet your requirements. One thing to note is that a lot of people pick on investment based on previous return, past performance is not a reliable indicator of future performance. There are many factors that go into how a investment will perform in the future. For example, you may have a fund that has a high proportion in Australian shares and ifthe Australian market has performed well in the past this fund may show good performance figures. The problem here though is if the Australian market where to stop performing as well as it has then this fund will obviously be impacted by this.
When investing you may decide to invest in:
Shares – investing in shares effectively means that you are purchasing a small portion of a Business. For example, if you were to purchase Telstra shares, this effectively means your own a small proportion of Telstra. There are many benefits in purchasing shares directly including capital gains from the growth of value of the business over time, dividends and potentially tax benefits (franking credits and Capital Gain concessions for investments held for a long period of time). The risks of share investment include, the share price for a company could fall dramatically (even to zero), if the company is to go into administration shareholders are the last to be paid and you may not get your money back. The other risk with shares is that share prices can go up and down from day to day and months to month.