People choose to invest for different reasons. People may want to save for dream vacations, a new car, or even a home. Before investors embark on these investment journeys, they should have a plan. People should consider the following before starting to invest.
- Does your budget permit this investment? Are high interest debts paid? Do you have an emergency fund?
- How much do you need for your goal? Ex. $10,000 car.
- When do you need the money? (Investment Horizon)
- What investment return do you need to achieve your goal? Determine what type of investments you need.
- Be realistic. Give yourself enough time to achieve your investment goals and have a realistic expectation of market returns.
How much risk is too much risk?
Not all investments are created equal. To get a higher return, investors often have to assume more risk. For example, stocks provide higher potential returns than government bonds but are riskier. Government bonds might be “safer” investments but might not generate enough return to get you to your investment goal.Each investor has to evaluate how much risk they want and are capable of taking in order to achieve their goals.
How much risk one can take depends on:
- Current assets and income. The more cash one has on hand, the better able they are to weather the ups and downs of their portfolio returns. They will be less likely to need to sell parts of their portfolio for immediate cash needs.
- Age: A younger investor will likely have more time to achieve their investment goals. An older investor may need to draw on their investments sooner
- Investment horizon: The longer an investor has to reach their investment goal, the more risk they can assume to generate their required return.
- What the investor does for a living: The more variable an investors source of income, the less risk, they should assume in their portfolio.