Published November 30, 2011
Despite what get-rich-quick schemes may claim on television, there is no single investment strategy that will bring instant success. While this means you will need to do a lot more research, it also brings ample opportunity to tailor that strategy according to your personal preferences. With so many options, you may wish there was a clear-cut guide to investing. Here are a few important factors to consider while planning out your unique investment path:
Set your goals
First, figure out your primary reason for investing. You may want to save for your retirement or finally drive cross-country in a convertible. Your goals will determine your investing time frame, which is an essential part of any investment strategy. If you are seeking more immediate gains, you will want your portfolio to include more liquid investments, like short-term bond funds. Long-term investments, on the other hand, can generate more revenue, but they also mean having your money tied up for a longer amount of time. Some long-term investments can include real estate or stocks. Whatever your motivations might be, it’s important to state them early and decisively, always making sure you stay on track.
Define your risk tolerance
All investments entail a certain amount of risk. While higher risk usually corresponds to an opportunity for greater returns, it could also cause anxiety and disappointment. There are three main factors for determining your risk tolerance: personal preference, investment capital and time frame. Before you invest, you have to honestly ask yourself how well you can handle the day-to-day volatility of the market. Determining your individual ability to cope with market fluctuations is vital to successful, enjoyable investing. Take a look at how much you can actually afford to invest and for how long. If you are averse to taking risk, you should have a lower proportion of risk capital funds in your portfolio. Younger investors with a longer investment lifespan may have more risk capital than retirees, for example.
As the old saying goes, don’t put all your eggs in one basket. It pays to invest in a wide array of sectors, albeit to an extent. If some of your investments perform poorly, you will have other investments that fare better.
Work with others
Investing can be a daunting endeavor. Luckily, there are plenty of experienced professionals with whom you can work. Brokers are great investment buddies to help you choose, buy and sell your orders. Depending on your budget, you can choose between a full-service or discount broker. Full-service brokers are typically much more expensive.
One thing to keep in mind when choosing a professional is the difference between passive and aggressive management. Passive management typically means that once you make an investment, it stays in place and follows the tide of market forces. Aggressive management tactics usually greater risk and higher returns. It’s up to you which of these styles resonate with your own mindset and time frame.
Keep a track record
However you end up investing, it is important to maintain a clear record of your portfolio. As you become a more seasoned investor, you will want to be familiar with how your investments perform. By understanding what approach has worked for you historically, you can do a better job of tweaking your strategies to your fullest advantage.