Before you invest , you need to decide on the best investment option for you. To make this important decision, you should consider your goals for the investment, how long you can afford to tie down your money and how much risk you are willing to bear.
Investment goals
It is important to define your investment goals at the outset, as the choice will depend on the objective you are trying to achieve. Common investment goals are:
Planning for your retirement
Buying your house
Providing for the education of your children or yourself
Buying a new car
Planning for a wedding or milestone birthday celebration
Going on holiday
Investment horizon
It is essential that you have an idea of how long you can leave the money in an investment (or investment fund) account without the pressure to liquidate before realising your objectives. Although mutual funds allow you to take money out at any time, funds that have a high degree of risk are meant for investors who have a long term horizon. This is because these funds typically invest in assets that can be volatile even though they tend to provide inflation adjusted returns over the long term. Therefore, if you invested in these assets for a short term, the risk of not getting your entire investment capital is higher compared to investing over the long-term.
Your investment horizon is fundamentally linked to your investment goals. For example if you are looking at buying a new car in a year, you may want to put your money in a fund that seeks to protect your capital invested and provide regular income.. However, if you are a 30 year old man investing towards a university education for your new born child, you are able to leave your money in a riskier, longer term fund in the expectation that the money will grow in line with inflation to cover the school fees when your child is ready to go to university.
Risk Appetite
Simply put, this means how much risk you are willing to take to get a higher level of return. The more risk you take, the higher the potential for real return, but also the higher the potential to make losses. If you are a risk taker, you may want to invest in a fund that has a higher proportion of investment in equities. However, for someone close to the age of retirement, you may want to stick to safer near cash instruments.
