Gauging your investment goals

Once you are saving on a regular basis, you will need to start making important decisions about how to invest your money.

Now, how do you do this? Easy, you can invest money sensibly by first stating your investment goals.

But how do you come up with investment goals that fit your needs? Well, there are some crucial questions you should think about when coming up with your investment goals. Let us take a look at some questions below:

1. What are your financial goals? Why do you need to save and invest your money?

2. How much money do you need to save and how much to invest to achieve your goals?

3. How long do you have to save or invest your money to achieve your goals?

4. How much risk are you willing to take?

5. How much return do you expect from your savings or investments?

6. What sort of sacrifices are you prepared to make to achieve these goals, such as changing your lifestyle and spending habits?

Be realistic when you consider your answers to the above questions. Look at your sources of income and see how much you can consistently save and invest. Your financial and investment goals should be reasonable and achievable.

Remember to make your financial and investment goals reasonable and achievable.

Investment risk and return Keeping your money in a savings or fixed deposit account with a bank is the safest form of investment. The return (namely the interest rate) is lower compared to other forms of investment, but it is not risky. You can go to sleep at night and not be worried about your money.

Of course, by keeping your money only in savings or fixed deposits, you would not be able to build your wealth as fast as you would like to.

However, keep in mind that although other forms of investments can give you better returns, they also sometimes carry greater risks, such as a greater chance of such investments losing their value.

For example, if you invest your money in the stock market, you face a greater risk of losing your money than if you were to keep it in a savings account. Share prices move up and down, depending on many factors.

You may have bought the shares of a company at RM5 per share, but this price can go up to RM7 or it can go down to RM2.

When you invest your money, you expect to earn a return on that money.

A return on an investment is usually stated as an annual percentage.

If you buy shares at RM10 a share and the price goes up to RM10.80 after one year, then your rate of return is eight per cent.

The actual return on an investment would, however, be after you have deducted related expenses. If you buy a house, for example, and then sell it, you will only know your return after you have deducted items such as legal fees, agent’s commission, stamp duty and bank loan interests. Do not put all your eggs in one basket

What happens if you put all your eggs in one basket and you drop the basket? It is very likely that all the eggs will break. Similarly, when you invest your money, do not put it all into one type of investment. If something happens to that investment, you would lose all your money.

It is important to diversify. It is smarter to put your money in different types of investment. In other words, plan for a balanced portfolio of investments.

Spreading your money across a variety of investments is the key to spreading your risks. When you do this, you are more likely to benefit substantially from your investments while eliminating chances of financial losses.

How you invest is partly determined by your investor profile, i. e. whether, as an investor, you are aggressive, moderate or conservative. Many people actually fall in-between these types.

If you are a moderate investor, you might invest a high portion of your money in different asset class such as unit trust funds and the balance in fixed income investments such as fixed deposits.

The amount that you assign to an asset class could be further divided among different segments such as a bond or equity fund.

If you are an aggressive investor, you might consider investing in more volatile investments such as shares.

On the other hand, if you are a more conservative investor, you might consider diversifying your money among less aggressive investments such as bonds and fixed deposits.

No two investors are exactly alike! You are the only one who can decide which options to choose and how much to spread your savings amongst the types of investment products available.

Next week, we will look at the many types of investments available out there in the financial market.