Solid and sustainable personal finance is a mix of several key
ingredients: low exposure to debt, a solid saving schedule, a
well-balanced budget.
A lot of personal finance experts would suggest that investment
comprises an essential part of that mix. Everyone is different when it
comes to investment. My grandfather swore by property. His mother swore
by the money she had in her mattress. However you are investing-
property, shares, a managed fund, bonds, term deposits- you need to have a solid investment strategy. Here are the 5 pillars of the strategy.
Goals
Investing is a fairly chaotic experience if you’re not sure what
you’re investing in. It doesn’t have to be a step-by-step developed
guide, but knowing what you are intending to do with your money is
important and will change your investing style. Are you investing for a
house deposit? Your retirement? A trip overseas in six months time?
Knowing your financial goals is essential when it comes to an investment
strategy. Once you know that, you’ll be far more aware of what
investment type and asset classes will suit your strategy.
Yield
Yield is forward-looking, a judgement about what the investment might
do over the period you are investing. It’s important to know what
you’re looking for, though obviously nothing is guaranteed. What kind of
yield do you need to achieve this goal? Could you achieve it in a
low-risk and short-term investment like a term deposit?
Or is an inflation-beating investment, such as shares a better choice
for this time of your life? There are calculators aplenty online, that
can give you an indication of what kind of yield you should be looking
for in investment. Of course, some investments can more concretely
assure yield than others.
Return
Return, on the other hand, is retrospective. It shows what an
investment has concretely earned. This is an essential aspect of an
investment strategy, although not a guaranteed predictor of future
yield. What kind of return are you looking for? When looking at
investment, especially in shares, are you looking for growth or
dividends?
Risk
One man’s risk is another man’s walk in the park. Risk is unique to
your situation and temperament and, while advice is essential,
eventually you have to make that decision. Risk is predicated on length
of investment, life stage, your general financial stability and debt
exposure. Deciding what you are comfortable with, and what is a
sustainable level of risk, is probably the most important element of an
investment strategy. Too many people have suffered because they weren’t
fully aware of the risk of their investment strategy, or because they
were overly confident it wouldn’t happen to them.
Time Frame
How long are you going to invest in this particular investment? Is it
short or long term? It’s important to include time frame, not solely
because of its affect on risk, but because you need to be sure you can
sustainably manage the investment for that period of time.
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