Chances are, we all make mistakes in life. When it comes to investments, we have so many options to choose from. How we come up with an analogy will influence our investment choices. Here are some tips on choosing the right option for you.
The first important question we need to answer is what is the relationship between risk and return? What is our interpretation of risk and return? In investing world, understanding this relationship help us make important decisions.
Risk and Return
Risk is the possibility of you lose money in your investment, and return is the amount you may earn.
Risk and return are fundamentally linked, the greater an investment's potential to achieve higher return, the greater the risk is associated with it. Once we understand this relationship, it leads to our next question.
What type of investors are you?
How you choose to invest is largely depending on the type of investor you are. There are many key considerations in choosing an investment, those include:
How long are you investing for?
How hands-on you want to be when managing your investment?
How much investment risk are you comfortable with?
What is your investment objective?
Our answers to these questions are likely to form our unique identity. Those will help us to match our decisions to our goals.
Understanding our risk preference.
We make decisions that we are comfortable with.
Each person has their own unique personality. When it comes to risk, we have different risk tolerance. A young person in his twenty is more likely to seek thrilled/adventurous experience, as compared to someone older, in his fifty. In investment world, we define this as aggressive vs conservative. In other words, how much risk are we willing to take, will form our investment portfolio.
Common objectives.
To many people, the reason we invest is to safeguard our future. There are many reasons why we should plan our future. Some of most common objectives of investing are:
Growth assets over time
Generate income to meet spending needs
Protect savings against inflation
By understanding our objective, we can make an informed decision that we are comfortable with. These objectives will help us creating a plan, so that we can choose the right investment option.
The importance of diversification.
One of the key benefits of investing is diversification. Diversification is the technique that reduces risks by allocating investment among different instruments, risky assets. It aims to maximize returns by investing in securities that will react differently to certain events. Understanding this important element will help us make a better-informed investment decision.
By compiling these factors, we can compute a strong case to make a good decision. These tips above will not only help us choosing the right investment option, but also a solid foundation to a better future.
Speak to your advisors today.