Most people have
the perception that investing is complicated.
Making decisions about suitable investments, anticipating whether the
markets are headed north or south, and then timing the sale to reap a profit
can be overwhelming.
Investors often hear common
phrases such as:
“It’s not timing the market; it’s time in
the market.”
“Buy low. Sell high.”
“Buy and hold”.
Although there
is truth in these messages, everyone’s investment strategies are different. When considering appropriate investments for you, you want to take the appropriate steps. Confucius, a philosopher, said, “What you hear, you forget. What you see, you remember.
What you do, you understand.”
You need to arrive at the point where you understand investing; this
will only happen when you take some
interest in the process.
To help
understand the world of investments, let’s follow a few basic steps.
1st
Step: Set the Ground Rules
Making choices
about the appropriate investments clearly starts with identifying your goals,
dreams, and aspirations. This important
step cannot be ignored. For obvious
reasons, your goals will dictate the appropriate investments to align within
your time horizon.
2nd
Step: Define the Time Lines
Knowing when
you want to accomplish something for the purpose of investing is important if
you want the money to be ready when you are.
Whether you are buying a new vehicle next year, planning your elaborate
vacation in five years, or saving for retirement over thirty years, you must
pace your investment strategy. Gradually
tucking money aside for each important activity is vital, so you are not
cramming to save as the deadline looms closer.
3rd
Step: Select the Appropriate Investments
Diversify,
diversify, diversify! Don’t keep all
your eggs in one basket! How many times
have you heard that phrase?
When you are
starting to invest, you may not understand the world markets. The terminology may be enough to either scare
or intimidate you. The word, “risk”,
makes you want to run. Yet if you think
about different types of investments as food, investing is not so
intimidating. Here’s your menu:
Light Stuff = Salad
Medium Stuff = Vegetables and Potatoes
Heavy Stuff = Meat and Fish (food with more substance)
Now compare this
menu to your present diet. Common sense says you should eat a balanced diet.
That’s true. Yet everyones’ likes are
different. You are unique. You are not like your neighbor, your best
friend, or any of your family members.
Therefore, you select your portion size based on your needs and health
requirements. This holds true for
selecting your investments.
In the
investment world as in your food world, your choices are the same: light, medium, and heavy stuff.
Deposit-Based investments
(Light Stuff) consist of savings accounts, guaranteed investments, and
money market funds. These are your “liquid investments” or investments
you can turn quickly into cash. When you
use these types of accounts, your intention is to ensure your money remains
safe and the value does not fluctuate.
Income-Based investments (Medium Stuff) are also
referred to as fixed income investments.
These investments can be fairly liquid because they are primarily
invested in government and corporate bonds.
With income-based investments, you are lending your money to the
government or a corporation who in turn pays you interest. Although a loss on these investments is
possible, the threat is minimal.
Equity-Based investments (Heavy
Stuff) involve ownership in publicly traded corporations. You own a piece of these companies, either
directly by purchasing common shares or indirectly through mutual fund
investments. Your expectation is either to be paid dividends for your
vested interest in companies or to have your investment increase in value.
4th Step: Choose the Weighting to Match Your
Investment Needs
Do you get queasy
when markets fluctuate? The ride
experienced in the markets can be compared to the same ride experienced on a
roller coaster: peaks and valleys, highs and lows, good and bad times! Your reaction
provides a clear indication of how much risk you are willing to take with your
money. How well you handle the rise and
fall in the value of any investment is a measurement of risk tolerance.
Choosing the
percentage allocated to each investment (or asset class) is matched closely with
your risk tolerance. Each investment type
is gauged according to low, medium, or high risk. This in turn is linked closely to the rate of return earned at any given time in the market. When you hear, “asset allocation,”
this, in essence, is what you are doing.
You determine how much money you will allocate to
bonds versus stocks. You determine your comfort level.
Remember the
portions of your balanced diet are similar to the portions of your
investments which are related to your saving purpose, time horizon, and risk
tolerance. Some examples are:
- You may choose to invest 100% in strictly deposit investments if your vehicle purchase occurs in a year.
- You may choose to invest 25% in deposit investments and 75% in income investment for your trip to Hawaii occurring in five years.
- You may choose to invest 20% in income investments and 80% in equity investments for your retirement occurring in thirty years.
Understanding
the different types of investors helps you recognize who you are so you can
select the appropriate investment strategy; BUT remember you can be several investor types simply because you
have different purposes for investing with different time horizons. It’s like having multiple personalities, depending
on the situation, yet you are still the same person.
Here are some
examples of investor types with respective allocations (estimated). Determine
which aligns with your investment needs.
Investor Type
|
Investor Description
|
Investment Allocation
|
Safe Investor
|
Very
Conservative
|
100%
Deposit Investments
|
Income
Investor
|
Conservative
|
80% Income-20% Equity
|
Income-Growth
Investor
|
Moderately
Conservative
|
60% Income-40% Equity
|
Balanced
Investor
|
Moderate
|
40% Income-60% Equity
|
Growth
Investor
|
Moderately
Aggressive
|
20% Income-80% Equity
|
High Growth
Investor
|
Very
Aggressive
|
100% Equity
|
Final
Step: Payoff–Getting Your “Big Toe” Wet
Taking an active part in your
investment strategy by understanding the different types of investments will
help accomplish your dreams.
- The dream retirement
- The dream vacation
- The dream vehicle
You need to
ensure your investments are going to make your dreams a reality. There’s two parts to growing your
investments.
ONE: The money you put into
the investment account.
TWO: The money you earn on
the money you invest.
You do your part. The markets will do theirs in helping you
build wealth to fuel your dreams.
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