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Making Wise Investment Decisions

Personal_Finance / Learning to Invest May 09, 2022 - 10:11 PM GMT

By: Mark_Adan


Looking to up your investment game? Here are some great tips to do so.

1.         Draw a personal financial roadmap

Before you even begin your path to investing, take the time to sit down and examine your financial circumstances and your investment capacity. This is especially important if you are investing for the first time. 

The first step is all about figuring out your personal goals and your level of risk tolerance. This can be done on your own or with the help of a professional financial counselor. There is never any guarantee that you will come out winning from your investments. But if you begin your investment journey with realistic goals and a clear idea of the risks you can handle, you can expect financial security and more control over your investment plan as it is set in motion. 

2.         Evaluate your comfort zone in taking on risks   

Any investment you hope to make is always a risk, simply because we are dealing with an uncertain future. If you plan on purchasing securities —like stocks, bonds, mutual funds, etc.— it will help to know about the risks involved. Unlike NCUA-insured credit unions or banks insured by the FDIC, the money you will be investing in your portfolio is not insured. This means standing to lose what you have invested even if the investments you have purchased were done through the bank. 

The important takeaway is that the rewards are quite often equal to the risks. If you have your financial plan geared toward long-term goals, you may find that investing in asset categories that carry a higher risk, like stocks and bonds, will bring you greater returns in the long run. By the same measure, if you will be making cash investments in line with short-term goals, investment trusts will work well. The biggest risk in these cash equivalents investments is inflation which can quickly erode returns. 

3.         Consider an appropriate mix of investments 

An investment portfolio confined by the rise and fall of conditions within a single market is in a very perilous situation. Investors who collect asset categories that are affected by different market conditions, protect their portfolios from significant losses. Traditionally, there are three major asset categories, these are cash, stocks, and bonds and they rarely move up or down at the same time. For example investors question if the UK market is at a crossroads.

The logical solution is to invest in more than one of these asset categories. This reduces the risk that your entire portfolio will be sunk when unexpected and unfavorable conditions beset the markets. If the investment you have made in one of these asset categories should suddenly take a fall, you will be able to compensate for the loss with the value of the other asset categories. 

Additionally, asset allocation is an important advantage in your quest to meet your overarching investment goals. If you don’t shoulder some calculated risks, you will never achieve any noteworthy returns. For example, if you are planning on saving for a long-term goal, like buying a house or paying for college, most financial experts recommend including some stocks or stock mutual funds in your investment portfolio. 

Lifecycle Funds – there are all types of investors and mutual fund companies offer plans to accommodate each one. For those saving toward a particular goal, like retirement, mutual funds offer an investment product called the “lifecycle fund.” This is a diversified fund that changes as it matures. It will switch to a more conservative investment plan as it nears a target date. 

The investor will pick a lifecycle fund with a target date that perfectly aligns with their personal investment goals. Then, it is the job of the managers of the fund to make all the decisions about the allocation, diversification, and rebalancing of the fund to best meet these goals. It is easy to identify lifecycle funds for sale because they will have names that include a reference to their target date. For example, you may see names like “Portfolio 2022,” “Target 2050,” or “Retirement Fund 2030.”

4.         Exercise caution when considering shares of employer’s stock or any other type of individual stock

One of the best ways to avoid taking great risks in investing is by never investing too heavily into one particular asset. The common sense reasoning is: don’t put all the eggs in one basket.  Choosing from a specific selection of assets within a category can help you offset losses caused by market fluctuations. You will safeguard against losses and sacrifice a minimum of your potential gains. 

Remember that investing heavily into individual stock options or employer’s stock places your eggs into a very risky basket. If that stock does not perform well, or the company declares bankruptcy, you will lose your investments and possibly your job in a single stroke of bad luck. 

5.         Create and maintain an emergency fund 

Any intelligent investor will tell you the same thing, place some cash aside to hold you off over the next few months in case the worst happens — like unemployment. As a rule of thumb, most investors suggest having as much as six months of accumulated wealth so they know they can fall back on something solid in case they face a financial crisis
6.         Pay off high-interest credit card debt

One of the best investment strategies and perhaps the foundation for all others to follow will be to pay off all high-interest debts you might have. If you already have some outstanding debts and high-interest credit cards, the best way to begin your path to investments is with a clean balance. 

7.         Consider dollar-cost averaging

The investment strategy called “dollar-cost averaging,” can protect you from making the common mistakes that stem from poor timing. The strategy follows a well-appointed plan for making additions to your investment plan over a long period. By making regular investments of the same cash amount over some time, you will routinely be purchasing when prices are low and less frequently when prices are high. Those investors that will be making a lump sum addition at the beginning or end of the calendar year should consider reviewing the nuanced nature of this strategy to finetune their plan and increase their returns — even more so for those involved in a volatile market. 

8.            Take advantage of “free money” 

As a rule, employer-sponsored retirement plans mean that the employer will match the amount of cash you invest into your retirement plan. If this is offered by your employer and you are not regularly paying your employer’s maximum match, you are passing up free money.

By Mark Adan

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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