How to choose the right investments?
With the U.S. financial crisis and the economic downturn due to major players in the U.S. filing for bankruptcy and the various takeovers, not to mention the fact that many of our own alternative investment schemes have been closed down, there is no better time for you to understand about how to go about choosing the right investment for yourself. Let us first start out by defining in simple terms what an investment is. An investment is where an individual places his or her money in an enterprise with the expectation of making a profit or gaining a return on the money you have invested. Now before you invest, it is important to identify what your investor profile is like. For those who are unfamiliar with the term „ investor profile‟ it refers to an individual‟s preference in investment decisions, for example: whether you are risk averse or risk tolerant; whether you prefer short term trading or long term trading, etc. Therefore in order for you to identify your investor profile, here are some questions you need to ask yourself with regard to choosing the right investments: 1. Where are you going? – as an investor you should have some goals in mind as to what you are saving for? How long you do you need to save for to meet your objectives? For example, are you saving to buy a house, for your children‟s education or for your retirement? 2. Have you learned all that you can about each investments?- What this is saying is that as an investor, it is best to learn all that you can about the various investments and their ratings before making your selection. Also a key point is to also get background information on the company you are about to invest in, just to be sure that your money will be safe there. 3. How has this investment performed in the past? – While past performance is never a guarantee of future performance, it will help to give you an idea of how the various types of investments have performed over the years in up and down markets. 4. How long do you have before you will need the money? – As investors you will need to decide how long to tie up your money whether it be short term like 30-90 days or longer term such as a year and more. 5. How should I “mix and match” my investments? – Most investor advisors would recommend that you allocate your assets to a variety of investments (diversification). That is putting some of your money in a conservative investment with stable rates of returns and distributing the other assets in investments with a higher risk and the potential for greater gains.
6. Are you a conservative, moderate or aggressive investor?- below are some tips that will help you to decide which category you call under: Conservative or low- risk investor: does not want to risk any of his or her principal, needs a guaranteed rate of interest on his or her investment and may be near retirement. Moderate or medium risk investor: can live with the ups and downs in the market, likes a combination of high-risk and low-risk investments and has some time for their money to grow. Aggressive or high-risk investor: can handle market swings, wants the highest possible long-term rate of return even if they risk losing their principal and has at least 10-15 years for their investments to grow.
Whatever your investment philosophy, you should never put your money in an investment you do not understand. Now that you have an understanding of how to choose the right investments, remember to also reconsider your investment portfolio periodically. That is, review it when you experience changes in your life, such as getting married, divorced or having a child, and it is especially important to re-examine your investments as you approach retirement age. Alison Lue-Taim is a junior account executive with Sterling Asset Management Ltd. Sterling provides medium to long term financial advice and instruments in U.S. and other world market currencies to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm