Investing your money may be one of the most effective ways to help you build long-term wealth. Here are some things to consider before investing.
Key takeaways
- One of the main things to consider before investing is to have a plan – consider your investment goals including when and how you want to achieve them
- Identify the timeframe you’re giving yourself to build your financial goals, and how much risk you’re prepared to take on
- There are many ways you can go about investing your money including through a managed investment fund.
Investing your money may be an effective way to help you build long-term wealth.
While it can seem overwhelming at times, given the breadth of options available, you don’t need to be a financial expert to be successful at it.
To help better prepare you and potentially reduce your risk, here are some things to consider before investing.
1. Set clear investment goals
Before investing, consider creating a plan. This helps you put into perspective not only your investment goals, but when and how you want to achieve them. It can also help to remove the likelihood of emotions influencing your investment decisions.
Start by asking yourself what you aim to achieve through your investments.
- Are you looking to build wealth for retirement?
- Save for a down payment on a house?
- Or fund your child’s education?
Your goals can influence your investment strategy and the level of risk you’re willing to take.
2. Review your timeframe
Before investing, it’s important to consider how much time you’re giving yourself to build towards your financial goal and how much risk you’re prepared to take on to get there.
For example, an investment plan for retirement may look very different to someone who is much younger. If you’re looking to access your money in a shorter time frame, remaining invested through ups and downs in the market may be unlikely, so a less risky investment approach may work to your favor.
Being aware of your timeframe will help you determine where you should invest your money and how much you should invest to achieve that goal. This will also help you to stay focused on the goal. Since you know being irregular with your investments can result in a shortage of funds, you will remain disciplined with your investments.
3. Know your risk tolerance
Every investor needs to find out his/her own risk tolerance. Some products can give higher returns than others, but there might be more risk involved. For example, mutual funds usually provide higher returns than time deposits but being market-linked they are riskier. Decide whether you have the stomach to tolerate that risk. Taking more risk than you can tolerate can give you sleepless nights which can eventually make you stop the investment before achieving your goal. Never invest in something which you feel is riskier than your risk tolerance level and you might stop investing in it midway.
There are three types of investors according to risk tolerance:
- Conservative – Have the lowest risk tolerance among the three and lean more on portfolios with steady growth
- Moderate – Have a medium level risk tolerance and values reducing risks and enhancing returns, equally.
- Aggressive – Have the highest risk tolerance among the three and seeks the best possible return through long-term investing.
4. Research the market
It’s critical to take the time to research what factors may have an impact on your investments so you can make informed decisions, before you consider investing.
Understanding what’s going on in the market, locally and globally, is important as it may have an impact on your investments. This can include things such as growth, unemployment rates, interest rates and inflation and even political events.
5. Check your emotions
There’s no denying that the nature of investing can be emotional. There are times where you may feel tempted to change your investment strategy because an area of your portfolio isn’t doing well, or you received recent news the market is going to plummet.
While these events may cause you to react quickly, such as selling off your assets, it’s important to consider your investment strategy. If your approach is intended to be a long-term plan, making decisions based on short-term market fluctuations, may greatly affect what you set out to achieve. Something to think about before you starts investing.
6. Consider where to invest your money
Before investing, consider where you want to invest your money. You may choose to allocate your money across a variety of asset classes such as shares, cash and bonds, or you may choose to invest your money in a single asset class, such as a residential property.
Diversification
One of the main advantages of investing in different asset classes is the ability to diversify your risk.
This means if one of your investments doesn’t perform well, your losses may not be as severe as your other investments will help to level it out. On the flip side, it does take more effort as you’ll need to remain up to date across a variety of market sectors.