Have you ever wondered how the rich got their wealth and kept it growing? Do you dream of retiring early, or of being able to retire at all? Are you simply thinking about investing, but don’t know where to start?
Well firstly, you should know that investing is not a get-rich-quick scheme. Taking control of your personal finances will take work, and, yes, there will be a learning curve. But the rewards will far outweigh the required effort.
Investing is normally considered a good way to make your money grow and create future wealth. However, before you begin to invest your hard earned money, you must consider a few things such as your objectives for investing and the level of risk that you are willing to explore. Ask yourself these questions:
- How much risk is right for me? Remember, higher risk means that you may lose some or all of your money so it is important to ask yourself “Do I want to take the chance to make more money if it also means I may lose money?” or “Would I rather make less and keep my money safe?”
- How much am I hoping to make by investing? This aspect deals with the return on your investment which can sometimes take the form of income (interest or dividends) or capital gains or capital losses. Generally, more risk is incurred if you expect a higher return.
- For how long do I plan to invest? An investor’s investment horizon i.e. the total length of time that the investor expects to hold a security or portfolio, is primarily determined by the investor’s investment goals, including income needs and risk tolerance. For eg, saving for a car is a short term goal whereas allocating money for retirement is a longer term goal. Once these goals are clearly defined, the appropriate investments can be selected to best achieve those targets.
- How easy will it be to get back my money from an investment? Cash is normally considered the most liquid asset since it is normally kept in small quantities in a purse or wallet while larger sums are kept in a regular bank account. The amount which is placed in a bank account can usually be retrieved from the teller or via an ATM. In most cases, when you give up the opportunity to easily access your money, you should obtain higher returns. However, it must be noted that many investment options which promise a fixed rate of return, usually lock your money into a specified time frame.
Know yourself and understand what is important to you. In this way, you will be better informed to make the best choices that are right for you. Success depends on ensuring that your investment strategy fits your personal characteristics. Even though you are trying to make money, you come from a unique background and have specific needs relative to another investor. As such you may want to pay particular attention to your investment objectives and your personality – as Warren Buffet says, “Never invest in a business you can’t understand…Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
A multi-millionaire is obviously going to have much different goals than a newly married couple just starting out. The millionaire, in an effort to increase his profit, has no qualms about investing $100,000 in real estate. The married couple’s focus is a bit more concentrated on saving to make the down payment for a house and every cent counts. They won’t risk losing their money in a speculative venture. So consider where you are in your life stage and weigh in your costs and benefits both in the long and short term.
Personality here refers to how much volatility you are willing to see in your investments. Another personality trait looks at your desire to research investments. Some people love nothing more than digging into financial statements and crunching numbers. To others, the terms balance sheet, income statement and stock analysis sound as exciting as watching paint dry.
Essentially the main thing determining what works best for you is your ability to take on risk.
Remember every individual’s situation is different and investors differ from one another. What is important to note is that an investment is not the same for everyone. You must also ensure that before purchasing any investment product, you consult with a registered investment adviser, broker or professional.
The Trinidad and Tobago Securities and Exchange Commission is not an investment adviser nor is it a brokerage house. This article is intended solely to provide you with the information you need to make sound investment decisions and to ensure that you are familiar with and understand your rights and responsibilities as a consumer of financial services.
Before investing, educate and empower yourself!
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