Years of education, hard work and determination will likely leave you with a pot of savings at your disposal. Many tend to leave this hard-earned money stagnant in a bank account. But there are a few practical strategies that can be followed to make your money work for you as you seek to invest.
Understanding your financial situation and attitude towards risk is paramount when making any investment decision. When setting expectations for an investment, be realistic about the type of returns you are hoping for. Past performance only provides an indicator of historical returns. Both long- and short-term track records should be analysed alongside performance in different market conditions and similar types of investments to ensure you are making an informed decision.
Collecting as much information as possible about a potential investment empowers you. It gives you an extra edge when making decisions. Ask lots of questions to make sure you have all the relevant information, and understand it, before making any decision. Your investment needs to match your goal, and you need to have a clear understanding of the risks associated. Communication on the cost, liquidity and legitimacy of your investment must also be transparent. This will help reassure you that the investment is the right one for you.
Make a plan
Choose individual investments that fit into this strategy — this is better than making investments on an ad hoc basis, or by reacting to market conditions. Given the variety of options available today, it’s important to seek guidance from a financial adviser. Nearly every investment entails special risks that should be discussed with an experienced professional. An adviser offers objectivity, support and guidance during periods of market volatility. Each investor’s goals are unique and proper guidance towards the most suitable products is essential.
When you’re comfortable with this plan, match your investments to your time horizon. For long-term goals such as retirement and children’s education, consider equity funds, which even though volatile in the short term, are more likely to give you the growth you’re looking for. For short-term goals, look at money markets or cash funds as they tend to be stable and predictable.
Risk and reward
All investments carry a certain amount of risk, and the rewards are normally commensurate with the risk you take. For example, equity funds have the ability to provide good returns over the long term, but the question to ask is: are you comfortable with the ups and downs of the markets?
There is no point investing your money in equities and spending sleepless nights due to short-term volatility. But at the same time, you need to ensure that your investments provide returns that are adequate to meet your long-term goals.
Putting money in different asset classes and sectors can provide a balance in your investments as they seldom move in tandem. It allows the ups of one to make up for the downs and losses of another by spreading your money across different types of investments.
No ‘right’ time
Trying to successfully time a market is next to impossible. Your investment decision should be based on careful analysis of your situation rather than purely on market conditions.
It is important to remember that any short-term volatility you might face tends to smoothen out over the long term. Investing is not a 100-metre dash. Rather, it’s a marathon run.
When the market is low, you buy more and when the market rises, you buy less. This disciplined investment approach has proven to be a successful way of building wealth for millions of investors all over the world.
Most of us are reluctant to take losses, which means admitting to mistakes. Until and unless you have a good reason to be optimistic about the future prospects of a loss-making investment, just sell it. We all make mistakes. The point is to learn from them and not live with them.
Emotions tend to overwhelm us whenever there is a significant shift in market conditions, or when we are faced with unforeseen circumstances, be they good or bad. While making investment decisions during such situations, one needs to be even more careful. An objective and deliberate analysis of the situation, taking into consideration the investment objectives and time frame, is an absolute must for achieving financial success.
As time passes, your life stage changes, as do your needs and income. Before making an investment decision, evaluate how it affects your current asset allocation plan. You need to periodically monitor and review your investment, assess whether your goal or risk tolerance has changed, and consider how the investment has performed compared to expectations as well as its peer group. After all, we invest to achieve peace of mind. Don’t let the wrong investments we make influence that.
— The writer is Director, Gulf and Eastern Mediterranean, Franklin Templeton Investments