When you are investing, you need to have clear goals, whether you wish to invest for the short term (up to 3 years), medium term (3-7 years), or long term (7 years plus), its about putting your money to work to achieve your personal goals.
Are you saving for a holiday within the next year or two? Perhaps saving for a deposit for a home (3-7 years) ?, Your children’s education or investing for your retirement (7 years plus). Setting a timeframe for your goals helps you to stay on track, they should be reviewed at least annually.
Setting a timeframe for each goal will help you work out how much investment risk you can afford to take.
If you are saving money for a short term goal, it may be tempting to use higher-risk investments, such as shares, however, due to their fluctuating nature, they my not be appropriate for short investment timeframes as their value might drop suddenly, just when you need your money.
But if you are saving for a long-term goal, such as retirement in 25 years, then you have time to ride out the ups and downs in the market. This means you can take on a higher level of investment risk.
The word ‘risk’ is also used to describe volatility. We believe investors are usually more concerned about the risk of not achieving their financial goals. To some people risk may mean the possibility of losing some of their initial investment. For others, it may be the risk of their assets not producing the income they anticipate. For others, it may even mean the risk of not having sufficient wealth to fund a desired lifestyle.
At Wealth Mantra we can help you develop a strategy to achieve your financial goals, considering issues such as:
- The return you need from your investment
- How comfortable you are with your investment value rising and falling
- How many years you will be investing for
- Your financial position
- Whether you need to draw down or receive an income from your investment
While the idea of volatility can be confronting, without it you may not get the returns you need to reach your financial goals.
The amount of volatility varies between asset classes as illustrated.
Growth assets, such as shares and property securities, usually have more volatility because many factors can cause their value to change. But we also expect they will generally produce a higher return than other asset classes in the long-run.
Defensive assets, such as debt securities and cash, generally have lower volatility, as their values usually don’t change by large amounts. Cash and other low risk investments generally provide a lower return over the long term, but are unlikely to lead to a capital loss if held to maturity.
Our aim is to guide you to understand the risk/return factor and determine what type of investment suits your profile, goals and time frame.
So where do you start ?
Firstly, we need to determine what it is you would like to achieve and the timeframe you would like to achieve it in, how much volatility you are willing to take with your investments.
Generally, the longer timeframe you have to invest, people tend to choose more growth style investment options as they have more time to invest, where as older people sometimes prefer more conservative lower risk investment options to preserve their capital as they are closer to retirement and don’t have time to recover if their investments produce a negative return.
By assessing your risk profile allows us to determine what assets would best suit your desired goals. The asset allocations in your portfolio are the various investment assets that are selected to maximise your returns at the risk you are willing to take. There are generally four broad asset classes:
- Fixed Interest
No asset class consistently performs better than another so it is important to reduce your volatility by diversifying. In doing so, good returns from one investment can balance the weaker returns from another.