You made the decision to start building your wealth by investing your hard-earned cash. Now what? How do you know what financial product is right for you? How much risk are you willing to tolerate? How do you decide which investments give you the best return? With an array of financial products catering to all types of investors, it can be challenging to find the best options for your financial goals. From traditional to alternative, stocks to real estate investments, it seems, as though there are options for everyone. Here are important factors you should consider before determining what type of investment mix is right for you.
Consider your age and retirement goals
Your age plays an important role in choosing the right investments. Usually, younger investors have more time to recover from losses without having to sacrifice their lifestyle or financial situation. That is, of course, if you are financially stable and not dependent on your investments. However, this may not be the case for everyone. Those who do depend on their investments and are a few decades away from retirement shouldn’t take on highisk investments without analyzing thoroughly how a significant loss could affect their lifestyle, financial situation and retirement. Investing should not be taken lightly and without due diligence. Knowing your time horizon is critical. An aggressive investment strategy can jeopardize your future source of income and in some cases, leave you at a complete loss. Instead, consider a more conservative approach including alternative investment options that safeguard your principal investment while earning interest over the course of time. The more time you have, the more you can benefit from the power of compounding.
Assess your financial situation
Everyone has a unique financial situation. For this reason, it is important to assess your current financial state to determine which investments are most beneficial for you and your goals. Understanding your short and long-term financial needs is key when making investment decisions. For example, a couple who may be saving for a home over the next 5 years, would not be wise to invest their savings in stocks that are highly volatile and susceptible to market fluctuations, as there is a high chance that they could encounter a loss. Planning your investment strategy according to your financial position, will keep you focused on building your wealth in your determined time frame. For those who may find it difficult to plan and strategize, or simply don’t know where to begin, seeking the help of a certified financial planner, may well be worth the cost.
Determine your risk tolerance
Not all investments are made for everyone. Understanding how much risk you’re willing to take will determine what type of investor you are and what type of investment approach you’re most comfortable with. It’s important to ask yourself, “How much am I willing to lose?” If you can’t imagine how you would recover from a big loss, or your retirement depends on your investments, you may want to take more of a conservative approach. On the other hand, if you find your finances and lifestyle wouldn’t be affected by a significant loss, your approach may be more aggressive, considering you have a higher tolerance for risk. With every investment, risk must be evaluated to ensure your financial well–being is not at stake.
Understand differences across investment types
It’s important to familiarize yourself with different types of investments in order to better support your decision. Fully comprehending all types of investments available to you will ensure you’re on track to choosing the best investment strategy to help you reach your financial goals. The most common types of investments include, mutual funds, ETFs, stocks, bonds and cash investments such as CDs and money market accounts. Each type of investment comes with it’s own risk-toeturn ratio and not all offer high-yield returns. For example, conservative investors may choose CDs, because they are known as low risk investments that are FDIC insured. However, CDs offer such low interest, that over the life of your investment, you can actually lose money (or better said, lose the potential to earn more on your investment) with the rising rate of inflation. On the other hand, alternative investments, such as those in real estate, tend to offer higher returns and lower risk. As an investor, it’s important to understand these differences so you can make informed decisions that actually grow your wealth. Additionally, diversifying your money across different types of investments may help offset the overall risk of your portfolio. Finding the right investment mix that works for your financial goals and time horizon is the real challenge.