BEFORE YOU START investing, it is important to consider your specific investment goals. Ask yourself: exactly why do I wish to invest?
For example: Would you like to retire in good financial condition? Would you like to travel the world? Would you like to accumulate the down payment in purchasing a home?
Do you need to prepare to fund the university education of your children in the next few years? Or would you like to start a business? There are a range of other reasons and your answer may include any multiple of goals. However, it is important to pinpoint why you plan to invest as specifically as possible.
It is also important to assess exactly when and how you would like your investment to generate profit and/or cash. An investment for retirement may be drawn on after a 20- or 30-year time frame into the future, whereas you may need to have the funds in hand for a child’s education within the next three years.
If you are considering a world tour next year or a multi-week cruise, you will likely need to fund the related cost within the next 12 months. What is the time horizon for each of your goals?
Then, how will you fund your investment? Do you have a sizeable lump sum? For example a lump sum may arise from insurance proceeds or from an inheritance. Alternately, will your investment be funded by regular periodic saving from your earnings? You may also start with a lump sum augmented by periodic injections of cash which may be at regular or irregular intervals. The extent of available funding constrains the level of your investment overall.
In choosing investments with a view to achieving your goals, it is recommended that you only choose investments that you understand enough to be in a position to assess the trade-off between the possible capital appreciation, the income generation, the liquidity and stability of the investment.
The capital appreciation is the increase in the value of the investment over time. If the investment loses value over time, there is a capital loss.
Some investments provide regular income by way of interest or dividends which is paid during the investment period. Shares held in a company may provide capital appreciation through the difference in the cost of the shares when bought by the shareholder and the price received by the shareholder when the shares are sold to a new shareholder. In addition, the shareholder would have been entitled to income from his share in any dividend declared and paid during the period in which he held the shares.
Share capital also provides a good example of the meaning of liquidity, which is the ability to convert a particular investment into cash as quickly as possible. Shares held in a publicly traded company would tend to be more liquid than shares held in a private company because of the wider market options. Real estate investments, on the other hand, are often cited for their likely illiquidity as it can take an extended period to get real property sold.
The stability of an investment describes the provisions made to preserve the original capital of the investment from loss or depreciation. The less likely that the investment capital can be eroded, the more solid is the stability of that investment.
Setting specific reasons, along with specific financial and investment goals, places you in a better position to select individual investments and combine them into an investment portfolio that will meet your goals.
You learn more and more about investing through the experience of monitoring and controlling your investment portfolio over time. Changes in your investment allocation are expected to change as you age and your time horizon and investment goals change.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email: [email protected]
