Investments – understanding the reason and risks involved in investments




 

Retirement Consultant & Coach Glenn FergusonWhen it come to investments, one of the questions I get asked all the time is “What investments should I be investing in?”

And my advice is always the same, before you start investing you should ensure that you educate yourself about investing and not only on the different types of investments that are available but also the risks that are involved in investing as well.

You see while there are basically only three broad types of investments – Bonds, cash and stocks. Each of these investment categories have numerous derivatives, which makes the entire process of investing that more complicated.

Unfortunately, it does not stop there because what you eventually invest in is also affected by the type of investor personality you have. Again there are three broad categories. You maybe either a conservative, moderate or aggressive investor, resulting in there different level of risk tolerance, high, medium and low.

So recommending an investment instruments is a serious and difficult thing to do unless you are aware of your specific risk profile.

The Three Different Investment Styles

  1. A conservative investors often invest in cash. As they prefer to take as little risk as possible and are happy to put their money in low risk, interest bearing investments that provides long term security of principle. Savings accounts, mutual funds, money market accounts, Certificates of Deposit, and Government Treasury bills are attractive to this type of investor.
  2. Moderate Investors also like cash instruments and sometime may take a little more risk by investing in stock and real estate.  But their risk taking is usually low to moderate.
  3. Aggressive investors invest in stocks which tend to have higher risk. These investors also like higher risk real estate and business ventures

There is also another factor to investing that provide a huge dividend and one that you may have little control over. Listen as Warren Buffet explains “being in the right place at the right time.”

Investments Luck helps wealth creation

 Investments definition

When it come to defining investments you will find that investments has different meanings in finance and economics. But here is an investments definition for you to consider.

Goal of Investing

Another critical question you need to answer before you start investing, is why are you investing in the first place. What is your investment goal?

You see an investment is only a financial instrument that is being used to achieve a desired end. Which means,  you need to know the goal of every investment you make.

This allows you to not only maximize the return on the investment but also minimize your risk. So you need to always begin with the end in mind and the end is you goal.

However, when it comes to goal setting most persons fail. Think about it I am sure that you may have set goal at the beginning of the year for yourself and I am sure that for you those goals maybe distant memory. 

But I want to realize that when it come to investing your goal setting is the most important investment decision that you will have to make.  As your goals will not only determine the investment instruments you use but the risk you take given your timeline for achieving your goals. 

Having goals will also help you to stay focus by allowing you prioritize the use of your time and resources to achieve maximum results.   So here are four steps to help you set your financial goals:-

  1. Set positive goals. You want to make that all you goals are based on a positive result.
  2. Give your goal an expectation date, that is the date by which you would have achieved the goal.
  3. Put your goal in writing, as this allows you to be constantly remind of your expectation
  4.  Never give up. You will only achieve your goal if you are focus and committed to it.

Here is a video on goal setting with Ric Edelman, that I found interesting. Ric was ranked the #1 independent financial advisor in United States by Barron’s Financial in 2009 and 2010.   Turn up the volume and let me know what you think?

Investments Goal Setting The Right Way

How to better understand your risk tolerance

When it comes to investments that one thing that you must accept is that there is risk involved and the sooner you come to terms with this, the better it will be for you.  As it will free you up to focus on what is really important better understanding your risk tolerance.

Your risk tolerance will definitely play a role in the type of investment instruments you use so here is an article on How to better understand your investment risk tolerance




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Glenn S. Ferguson