Friday, August 17, 2012

5 Basics For Your Investment Strategy

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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