Factors to consider for successful investment
Savings are important. You must have heard this all your life, and you may even have a savings plan in place. Often people limit their savings to accumulating their money in a bank account or getting insurance coverage that comes with a savings option. While there is nothing wrong with these ways to save money, you should not neglect investments. Having a long-term investment plan helps you make good use of your money, which would otherwise be lying unproductive in your bank account. Additionally, investments enhance your returns and also safeguard you from the ill-effects of inflation and contingencies.
In spite of these benefits, people have a pessimistic view on investments because they assume that investing in stock markets is equal to losing money. The complex jargons and sales techniques employed by financial institutions are enough to demotivate these people from investing. On the other hand, many people who take up investments immerse themselves completely in the subject. They try to gain as much knowledge as they can by reading about investing concepts and staying abreast with the trends. In truth, investments do not lead to losses always, and you also don’t need a Ph.D. for successful investment. You only need to bear the basics in mind.
Today, we give you some factors for successful investments that you must consider before embarking on the journey to invest:
Your Investment Objectives
Do you want to invest to save for your retirement? Or, are you investing for a wedding or to buy a home? Identify your long-term and short-term goals. This is vital because without having a goal you will not be able to channelise your money in the right direction. Your goals help you figure out the amount you need for investments, the type of investment products you should invest in, and the amount of risk you can take. It allows you to strategise your investments to ensure your objectives are met.
Different Investment Products
There are various investment products from bonds to index funds that cater to different types of investors and different investment objectives. Some familiar and safer options include the Straits Times Index (STI) Exchange Traded Funds (ETF) that tracks the top 30 listed companies and ABF Singapore Bond Index Fund that tracks the high-quality bonds. For starters they are good options. Complex investment options like banking stocks, Real Estate Investment Trusts, and shares of different companies can be taken up once you are confident about investing. Make sure you understand each of these and how they work before investing in them. Also, bear in mind your objectives while considering investment products.
Understand Asset Allocation
One of the important terms to understand and remember when investing is asset allocation. It refers to the act of apportioning your investments with the aim of balancing risk and reward. It is an investment strategy where your funds are spread across different asset classes in consideration with your objectives, risk tolerance, and investment horizon. The strategy typically includes equity and debt, but may also include real estate and commodities like gold. When you spread your money in different asset classes it protects you from any economic and political changes that influence a particular investment product.
The word diversification is often confused with asset allocation. Yes, the aim to diversify your investments is somewhat similar to that of the objective of asset allocation – to reduce risk exposure and not let your returns be affected. But, both strategies work differently. When you implement asset allocation, you invest in different asset classes. For example, you may be investing in the stock of one company and even buy bonds of the same company. While you are trying to reduce risk by investing in different products, you are still putting your money in one entity. Diversification works on the popular saying of ‘you should not put all your eggs in one basket.’ It goes beyond the products and diversifies risks by taking into account different categories and entities. Irrespective of the difference, both are vital to succeed with investments.
The Relation Between Risk and Returns
Another important concept of investing that should be understood is the relationship between risk and return. Typically, the higher the returns expected, the higher the risk to be taken, and vice versa. Some riskier investments may also lead to losses. Every investor has a different risk appetite. And, this depends on various factors like the personality, financial situation, circumstances in life, goals, etc. Depending on your objectives and situation, you can design an investment portfolio that caters to your risk appetite.
Your Investment Horizon
What’s your investment horizon? Are you looking at a long-term plan or do you need to cash out your investments in a few years? Your investment horizon typically aligns with your goals. And, depending on your lookout, you can opt for products that suit your risk and return needs. If you have a longer horizon, then you can take risk as you have the time to survive the volatile nature of investment products. But, if not, then you should minimise your risk and protect yourself from constantly changing market conditions.
These factors for successful investment are critical and must be understood well to ensure maximum gains. In addition to this, continually monitor your investments and beware of any temptation that drives you away from your plan.
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