If, like most people, you’re anxious about the future and rising costs, chances are you’ve thought about investing the money you already have.
Unfortunately, investment can seem complex and daunting for those unfamiliar with it. As such, even before deciding on where and how to invest, it’s vital, first and foremost, to be clear about what investing entails.
Saving vs. Investing
Most people understand the need to regularly set aside some cash for the future. So, if you’re someone who’s already been saving, kudos!
The reality, however, is that putting money into a savings account may not be enough when inflation i.e., rising costs, is factored in.
Essentially, experts predict that prices of goods and services will continue to rise in the coming years. Hence, over time, the cash in our bank accounts will likely lose its value and be insufficient for what we want and need.
This is why it’s necessary to look at investments as a means of growing our wealth.
Types of Investments
There are various ways to double and triple one’s funds. For instance, you could use your available cash to start a business and work on your endeavour until it generates a profit.
However, most people tend to associate investments with certain financial instruments and assets. Here are some of the most common:
Stocks — Stocks or shares afford investors a portion of ownership in a company. This means you can vote at meetings and enjoy a slice of the profits, which are paid in periodic dividends. Additionally, stocks can also grow in value, which could mean significant future gains.
Bonds — Bonds are loans to companies and governments, which entitle you to the face value of your capital by a specified date in addition to periodic interests. In a sense, bonds are like fixed deposits. The difference is that bond interest rates tend to be better.
Commodities — Commodities are essentially raw materials like iron ore, gold and oil or resources like sugar, which can be invested in for profit. It’s important to note, however, that certain commodities are more volatile (e.g., oil) than others (e.g., gold). So, commodity investments can be risky.
Mutual Funds — A mutual fund is a professionally managed scheme that combines your money with cash from other investors for the purchase of stocks, bonds and other assets. All buying and selling is handled by fund managers, which makes mutual funds more attractive than personally managing your investments. But fees can reduce your profits. Plus, you can’t choose your investments.
Real Estate — Some people choose to buy land or property with their available cash to lease out or sell for profit. Indeed, making money from short-term rentals ala Airbnb has become very popular. Note, however, that real estate investments can come with many challenges, from difficult tenants to high maintenance costs and taxes.
Cryptocurrency — Cryptocurrency is digital or virtual money that can increase in value and is easier to buy and sell than stocks or bonds as they’re usually not subject to strict regulatory controls. A point to note, though, is that cryptocurrencies can be extremely volatile.
Determining the Right Investing Style
Whatever type of assets you settle on, it’s important to find the investment strategy or style that suits you best. Think about it like fashion. Skinny jeans look great on some body types, but not others. As such, it’s important to consider your own unique situation, including your age, needs, wants, financial capacity, and risk tolerance, before deciding on a strategy.
Here are three questions to help you get started:
1. What Are My Financial Goals?
Are you planning to invest for retirement, your children’s education, or to start a business? You can have a single end goal, a few targets of varying duration, or even tweak objectives to reflect the different phases of your life. The bottom line is to always keep your aims in sight, as they will help determine your overall approach and how much funds to allocate to investments.
2. What’s My Risk Tolerance?
Every investment involves risk. For instance, your stocks can appreciate in value when the company you’re invested in reports good financial results. But prices can just as easily fall on the back of negative news, poor market sentiment or decreased demand. Hence, determine from the get-go if you want to be more conservative and concentrate on lower-risk assets (e.g., bonds) or if you prefer a more aggressive style that involves investments which promise higher returns but can make you vulnerable to losses (e.g., stocks, commodities and cryptocurrency).
3. Is Diversification for Me?
One way to mitigate investment risks would be to diversify your portfolio or in layperson terms, spread your cash among various investments. This not only reduces the likelihood of losing money in the face of volatility, but also ensures that you meet your financial goals. You will, however, have to decide the asset allocation mix that works for you. For instance, a 60-40 investment mix featuring 60% of stocks and 40% of bonds is considered good enough for most people. But you could just as well adopt a more aggressive style that’s geared towards maximising returns.
Forging an Investment Style with Financial Literacy
At the end of the day, determining the right investment approach for you involves many different things, which can and will change with time and the different phases of life. What’s most important to recognise, however, is that the earlier you begin your investment journey, the better your overall financial health is bound to be.
As such, if you haven’t already, it might be time to consult with a professional financial advisor and learn about how best you can grow your wealth.
You may also want to brush up on your overall financial knowledge by immersing yourself in free reading resources from established financial services companies like Bankrate and Experian as well as financial media websites like Bloomberg and Investopedia or even signing up for financial literacy programmes like FinGreen by QNET.
Since 2021, FinGreen has focused on empowering individuals to make better financial decisions via education and training, and the record shows that we’ve made significant gains. Hence, it goes without saying that budding investors looking to forge their own investment styles could also benefit from improved financial education.
