Investing part of your earnings is an excellent decision and now that you have made that decision, this article will shed some light on what considerations you should make while deciding how exactly those investment funds should be allocated.
Building an investment portfolio is not as technical as it sounds. With the advent of technology, most stockbroking firms and asset managers have empowered their clients with the ability to trade online and acquire other investment assets, anytime, and anywhere in the world.
However, every investor should answer a few questions before they begin to invest. What is my time horizon, how old am I, How many years do I have till retirement, how often will I need to make withdrawals for my short-term liquidity needs. Investors also need to be realistic about their risk appetite bearing in mind that, the higher the risk, the higher the potential return.
Defining your investment goals and the time horizon are key factors in building the portfolio that suits you. Investments in stocks are known to be risky as stock prices are volatile and prone to various economic shocks. It, therefore, requires a bit of work and attention. Whether you are a passive investor or not, you need to constantly keep abreast of activities in the stock market, the economy and pay particular attention to the companies you have invested in. Investing in companies with proven track records, solid corporate governance standards and positive outlook on earnings from products or services they offer will, however, guarantee that the portion of the portfolio invested in stocks will be profitable.
Government debt instruments and other fixed-income instruments, on the other hand, are less risky and guarantee a fixed amount of returns on invested funds. Government instruments are effectively risk-free while other corporate entities pay a premium above the government’s lending rate to compensate for the risk that investing with them presents. Other fixed income instruments available are bank deposits, commercial papers and bonds. The key here is to only invest in government debts and instruments issued by companies who have received impeccable ratings and standards and have a track record of paying down their loan obligations.
Depending on how much risk you are willing to take, and how much patience you have with your investment funds, you can choose what percentage of your funds will be allocated to each asset. If you are however confused and still find it all daunting, you can easily call your asset manager and ask to invest in a mutual fund. Mutual funds are collective investment schemes which aggregate client funds and invest in a basket of instruments on behalf of the clients. In this case, fund managers make the investment decisions and allocate your funds on your behalf using their technical expertise to maximise the returns on your investments.
Other investment classes such as real estate and currency investments also exist. They are capital intensive and require extensive research and technical expertise.
Now that you know the different assets you can invest in, check how they fit in with your plans. How much of your money do you want put aside to make more money for you? How long before you need that money to go for an MBA or to buy your dream house? How much risk are you willing to take? If you lose some of the funds, is there enough time to make it back? The answers to these questions are the building blocks upon which your ideal and unique investment portfolio will be built.
How often do you evaluate your investments?
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