Why do you want to invest?
So often people ask about what to invest in as opposed to why they want to invest. Your overall goals, age, risk profile and reason for investing all need to be considered when deciding on the type of investments that you should choose.
Everyone’s financial goals are different which means different investments suit different people. So don’t always listen to your neighbour or a friend for financial advice on investments because what is right for one person, may not be right for you.
Let’s take two completely different situations.
Sarah would like to invest her money for the next two years, when she then intends on using the money to go travelling for a year.
So her time frame is 2 years, and she needs access to it at the end of the two years. In the scheme of things, this is a very short time frame. Would shares be appropriate for her? Not likely. Shares are
considered a longer term, higher risk investment, and should really be considered for a time frame of 5 years or more.
Depending on her situation Sarah should be considering fixed interest or term deposit type investments to ensure that her money doesn’t fluctuate too much over the next two years and she can gain access to it when needed. Sure a term deposit may not earn as much as some shares, but it is very low risk, so you can essentially count on what you are going to get.
Dean on the other hand, has come into some money through an inheritance. He is 35, doesn’t need access to the money for the next 10 years, so is looking to invest this money.
In this situation, Shares could be considered (assuming it matches his risk profile). The share market is volatile so one year could completely drop, but the next year could bounce back up. (For example, In 2008, Australian Shares dropped -38.4%, and then in 2009 went up 37%). For this reason, shares are considered a longer term investment so that you can ‘smooth’ the volatile returns over the long run.
You see how their situation and goals directs the type of investments they should have?
When deciding on what you invest in, you need to think about the following aspects:
- How old you are.
- When you need access to the money.
- How you feel about risk, and the possibility of losing your money.
- (Remember nothing is guaranteed in the investing world, or in the world in general for that matter).
- You goals. What are you trying to achieve? Do you need the money for something specific? Are you saving for retirement? A home? To pay for your child’s education? All very important questions to ask.
- Do you have excess cash in case of emergencies?
There is no right or wrong answers in this, but it is important for you to be honest with yourself, and with whoever is advising you on your investments. The ultimate investments and strategies that you use, should align with all of the above aspects to get the best results.
– This post is from our resident senior financial planner, Cara Brett. Check out her details in our about us page.