FACTORS TO CONSIDER BEFORE INVESTING
Before you invest, you need to decide on the best investment option for you. To make this important decision, you should consider your goals for the investment, how long you can afford to tie down your money and how much risk you are willing to bear.
It is important to define your investment goals at the outset, as the choice of investment (or investment fund) will depend on the objective you are trying to achieve. Common investment goals are:
- Planning for your retirement
- Buying your house
- Providing for the education of your children or yourself
- Buying a new car
- Planning for a wedding or milestone birthday celebration
- Going on holiday
It is essential that you have an idea of how long you can leave the money in an investment (or investment fund) account without the pressure to liquidate before realising your objectives. Although mutual funds allow you to take money out at any time, funds that have a high degree of risk are meant for investors who have a long term horizon. This is because these funds typically invest in assets that can be volatile even though they tend to provide inflation adjusted returns over the long term. Therefore, if you invested in these assets for a short term, the risk of not getting your entire investment capital is higher compared to investing over the long-term.
Your investment horizon is fundamentally linked to your investment goals. For example if you are looking at buying a new car in a year, you may want to put your money in a fund that seeks to protect your capital invested and provide regular income.. However, if you are a 30 year old man investing towards a university education for your new born child, you are able to leave your money in a riskier, longer term fund in the expectation that the money will grow in line with inflation to cover the school fees when your child is ready to go to university.
Simply put, this means how much risk you are willing to take to get a higher level of return. The more risk you take, the higher the potential for real return, but also the higher the potential to make losses. If you are a risk taker, you may want to invest in a fund that has a higher proportion of investment in equities. However, for someone close to the age of retirement, you may want to stick to safer near cash instruments.
If you are an experienced investor, you are able to invest directly in the different asset classes or pick an investment fund using your own knowledge, skill and experience. However, if you are just starting out, it may be advisable to speak to someone for advice. Investment funds are the easiest way for beginners, as you just need to have a basic idea of financial markets and the professionals will ensure your money is invested in the best possible way for you. Even if you have experience, sometimes it is good to talk to professionals who have access to more market research and other information. Our Investment Center officers are always glad to help if you need financial advice.
HOW TO INVEST
After deciding to invest, you still have to choose how frequently you want to add to your investment and whether you want your interest paid out regularly.
Growth vs. Income
You have to decide whether you would prefer your savings to keep increasing or whether you want regular payments. If you would like to increase your savings, you are advised to reinvest your dividends into your investment (or fund). However, if you need to have a steady income for everyday spending or other purposes, you can choose to have your dividends paid out. You can also combine both options.
Lump Sum vs. Regular Savings
You have to decide on how frequently you want to invest, and the amount. If you have a lump sum to invest, you may want to make a one-off investment. However, you can also choose to invest a regular amount from your salary, or just make payments whenever you have excess cash. It is up to you to decide what you can afford and what is realistic for you, keeping in mind your financial situation and investment goals.
Last Update: November 25, 2016