“If you do not find a way to make money while you sleep, you will work until you die.”
– Warren Buffet.
Today, investing is one of the easiest ways to generate additional funds while you rest. However, unplanned investments without an objective in mind could endanger your monetary future and lead to serious complications in terms of returns and value loss.
So to help guide your investment process in an intelligent manner, in this blog we will go over what should be on your radar before beginning investing.
Here are five factors you must keep in mind prior to investing.
1 Know Your Investment Objective:
Life presents us with many things we would like to purchase or do at some point, including buying a home, vehicle or travelling to far off corners of the planet, gifting loved ones an expensive watch or piece of gems, etc. However, most of these desires can be realized by setting investment goals and devising ways to meet them without too much wasted effort or time wasted in doing so.
There are certain goals that are common to all, such as saving for retirement or saving for schooling of one’s child. At the same time, everyone may have specific goals such as buying your dad a Rolex watch or watching Wimbledon Finals live.
As such, it is crucial that you determine your investment goal before determining how much money would be needed to reach it. Perhaps you need Rs 20 lakh for paying down your house or Rs 4 lakh to watch Wimbledon Finals live streaming online?
2 Know Your Investment Time Period:
Once your investment goal is clear – such as saving for your child’s school admission – then a timeline emerges that helps determine when exactly to reach that objective. Say your child/little girl is two years old; in that instance, one year should suffice. Knowing this timeframe also helps in understanding whether it’s short-term, midterm, or long-term goal setting.
As an example, any goal that needs to be completed within three years can be considered a short-term objective, for instance planning a trip across eastern-Europe in one year and saving for it is considered a short-term goal. Midterm objectives that are three to five years away such as saving for down payments on houses are classified as intermediate goals while long-term ones include saving money for advanced education for children or their wedding expenses can also fall under this category.
By understanding your timeline, you will be better equipped to determine where and how you should invest your money for a particular goal, as well as remaining focused on that objective. Knowing that unwise investing practices could leave you short of funds will keep your investments more regulated.
3 Know Your Risk Tolerance:
Every investor must assess his/her own risk tolerance. Some investments offer higher yields, yet involve greater risks. Mutual funds often offer better yields than fixed deposits due to being market-linked; determine if you can handle such challenges as too many may cause you to stop before reaching your investment goals.
Say you invest in a mutual fund based on a five-year goal and during its third year the business sectors decline significantly and value of your mutual fund decreases accordingly. Any losses we see at these points are paper losses; for instance the price is now lower than when purchased; it would likely go back up soon though. Yet you worry excessively and seek to reclaim mutual fund units instead, creating real losses which make achieving your goal impossible without delaying too long.
Therefore, be wary of investing in something which seems riskier than your risk tolerance level and you could find yourself abandoning it halfway through.
4 Know Your Asset Allocation:
Diverse asset classes perform well at various points in time; having various asset classes in your portfolio will ensure that investments are consistently protected.
Gold’s returns remained low for some time until finally rising after last year. Meanwhile, values were showing spectacular returns prior to collapsing during a pandemic; yet gold kept providing phenomenal returns during that time. If an investor were diversified across various resource classes in their portfolio, should one class experience difficulties at any point, the other well-performing resource classes would make up the difference and cover any misfortune.
As always, your allocation for each resource class should depend on your risk appetite rather than what current returns it generates.
5 Know Which Item To Invest In:
At last, it is essential that you select an investment item which complies with your investment goal and should meet both risk appetite and tenure requirements. When making this selection, two aspects are particularly essential to keep in mind – risk appetite and investment tenure are two things which should be carefully considered when selecting an item to invest in.
As soon as your child reaches 16-17 years old, you need to begin investing for his/her college education – an investment goal 16-17 years away. Here, the emphasis should be on earning inflation-beating returns by selecting an inflation-beating monetary instrument such as Mutual Funds through Tastes.
Each investment has different goals, which requires selecting an investment instrument tailored to those goals.
Primary Concern :
Aiming to invest is wonderful, but motivation to achieve that goal may quickly wane if your objectives, tenure and tools for investments don’t align. Before diving in headfirst, identify why you are investing, for how long and your risk tolerance – these will all help ensure you meet your investment goals consistently.