Before choosing whether and how to invest, you need to reflect on the elements that help define your investor profile. Careful financial planning and family budget monitoring are necessary steps in order to choose your ideal investment path.
The question that every investor should ask is “what should I invest in?”.
Here are some of the goals that those approaching the world of finance and savings could have.
Liquidity management
Temporary surpluses between income and expenses should be invested, albeit in easily liquidated instruments, to prevent them from being consumed in real terms. The current accounts of the bank that can accumulate these temporary surpluses are not real investments, but fall into the category of means of payment.
The remaining figures in the current account lose purchasing power. In fact, all investors should have cash reserves to meet unexpected needs, such as healthcare expenses for example.
Typically, this should represent a priority financial need, but at the same time liquidity should not be too high in the portfolio as it is the lowest yielding component.
Capital growth.
In order to increase capital to achieve the goal (pensions, house purchases, university for children, inheritance, etc.), risk appetite and investment time horizons become relevant.
The higher the former and the longer the latter, the more aggressive the chosen investment vehicle must be.
However, the rule to follow is diversification. Even without a specific purpose, it can be said that any investor or saver has a minimal goal of capital growth, that is, to earn returns above inflation from their investments or savings.
Use of regular annuities.
This need manifests itself not only in retirement, but at every stage of life, when current income is not sufficient to support the ideal standard of living.
To implement the idea of financial planning, it is necessary to carry out two operational steps. It is necessary to divide the available assets in the investment portfolio and provide an investment plan for future savings. Click here to read the three universal rules for financial planning.
The implementation of these two phases allows to satisfy predetermined requirements in an order of priority compatible with the available resources.
But before making any financial plans, you need to know how much you can save. For this it is useful to draw up a budget, set spending and savings targets and verify that they are followed.
Don't forget to set your time horizon. This is in fact the period of time in which you intend to give up your financial resources to invest them. It depends on the subjective circumstances and individual and family needs.
Time horizon
When do you think you need the money you invested?
For example, if you need your money in a few years, you will have a short time horizon. In general, the longer your time horizon, the more risk you can choose to take in your portfolio, but this also depends on your risk tolerance.
Here is one way an investor might look at their time horizon:
· Short-term horizon : up to 5 years
· Medium-term horizon : 5 to 10 years
· Long-term horizon : 10 years or more
It is always better to articulate your time horizon, in this way your financial advisor can better help you reach the right goals for your specific needs. Click here to read what the financial advisor does.
Conclusion:
The most basic steps an experienced investor or saver should follow are:
· Have a good understanding of their priority financial needs and the resources (current and future) available to meet them;
· Understand the financial tools that can meet these needs;
· Adopt a plan to achieve the stated objectives through the use of these tools;
· Remain consistent with the line defined in the plan to be implemented.
The latter is probably one of the most difficult behaviors to carry out. The volatility of the market amplified by the media can lead to the temptation to change direction during the implementation phase of the plan, with a view to correcting the impact of a possible decline in the valuation of financial instruments.
That said, changing your mind often results in failure to achieve stated goals as a final effect. Consistency is undoubtedly one of the winning qualities of a good investor.
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