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| Home > Investment Stategy >Investment Strategy |
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| Investment Strategy |
Finding the right investment has become quite a challenge. Most of us fall prey to buying the latest top performers and accumulating a few shares of this and that without really considering our financial goals, timeframe and tolerance for risk.
Whether you are planning for your individual retirement, investing to meet the expenses of your child's higher education, or simply building cash reserves, it is important to match your financial goals with a mix of assets that may help you meet those goals.
To build a successful investment strategy you should carefully structure your plan to achieve your goals without taking more risk than you can afford or are comfortable with. You also need to consider how much time you have to reach your various goals.
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| What financial goals do you want to achieve? |
| The first step is to define your financial goals. Your choice of investments should always be driven by what you want your money to do for you, and when. You may want your investments to fill specific needs such as buying a house or a car, paying children's education costs or simply building a comfortable retirement nest egg. Your goals may be more general—like building cash reserves or accumulating wealth. Either way, spending time to determine your financial goals will help you choose the most appropriate investments. |
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| When do you hope to reach them? |
The next step is to identify the approximate time frame within which you wish to achieve the goals you have listed. For example, do you aim to buy a house in five years, or retire in the next twenty years? Setting time frames for your goals is critical.
Different time frames require different investment strategies. The sooner you need to spend the money now invested, the greater is the need to invest for principal stability and liquidity. Conversely, the longer you can leave your money invested, the less you need to worry about short-term price fluctuations and the more you can focus on earning a high return over time.
Risk, return and timing are all related. Generally, the riskier an investment, the higher its potential return over time and the more suitable it is for an investor with a long time frame.
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| How much money will you need to invest to achieve your goal? |
| Most of us fail to take into account inflation and taxes. Therefore, it would be advisable to spend some time and take into consideration, the future cost of the goal. Can you achieve your goals with amounts that you have already invested? |
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| How much risk can you afford to take? |
Each and every individual has a personal tolerance for risk and in order to set an investment course that you will be comfortable with—and will not abandon prematurely—you need to think about your willingness to accept fluctuations in the value of your investments.
As you assess your risk tolerance, you will need to consider how soon you need to reach every investment goal. Longer-term goals allow you to pursue more aggressive and potentially more rewarding strategies because the investment has time to recover from market setbacks.
Financial goals that need to be met sooner rather than later call for lower or moderate risk approaches. Whatever the investment profile may be, one of the best ways to reduce overall risk is to diversify your investments. |
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| Do you need to rethink your investments periodically? |
No single asset class (stocks, bonds, or money market instruments) is appropriate for all of your goals. At any given point in your life, you will probably want to keep part of your money secure and accessible, part invested for income and part invested for growth. But the proportions will change as you prepare for and achieve successive investment objectives.
It is a good idea to review your goals and investments once a year, keeping in mind the objectives each time a new investment is made. As your circumstances change, so will your investing strategy. |
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