There will likely come a day where you have to move out of your parent’s house and live on your own. Have you had any thoughts on whether or not you’ll be able to manage?
You may have the finances to last for a few days or weeks, maybe even a month, but you will need additional savings that will ensure you survive an unexpected financial crisis.
If you want to be able to keep your head above water if such a situation was to arise, it is important to make countable investments when you have the resources in hand.
Investment can be a concept that is full of murky waters, especially for someone who lacks financial knowledge. But, it is never too late to educate yourself and make the right investment decisions in future. Discussed below are some of the crucial aspects you must consider before making any investment decisions:
Design a Financial Roadmap
If you are preparing a financial plan for the very first time, it is imperative to primarily check your current financial status. It is necessary to draw an honest conclusion of your current belongings and thereupon make investment decisions.
The next step is to determine the effect of a particular investment on your finances. This includes finding pros and cons of the schemes you are planning to invest in. You can always seek assistance from a professional expert for a second opinion.
One fact about investment is that you might not necessarily earn profits from them. This should not prevent you from taking risks. You can always take calculated risks where you have considered your current situation and planned wisely to earn profits in the long run.
Determine your Comfort Zone
Irrespective of whether you invest in stocks, bonds or mutual funds, there is a certain amount of risk involved in all investments. This makes it imperative to understand the plan and process before you actually invest in them. Investor and financier Erik Gordon suggests taking the time to research stock and bond options before talking to your financial advisor.
There are some investments wherein you may lose your principal amount along with expected profits. On the other hand, there are quite a few investments which provide you with a principal amount even though you have lost profits.
It is believed that taking risks leads to higher investment returns. If you are planning for a long-term financial investment, it is suggested to opt for stocks and bonds. Because investments in cash equivalents involve more inflation risks, they are definitely an optimal choice for short-term investment but of course, they are the riskier route.
The Appropriate Mix of Investments
Investment returns on various asset categories keep fluctuating as per the market scenario. A good investor can definitely guide you through it with minimum loss.
In recent years, ROI of bonds, cash and stocks have been static. However, it is wise to invest in different categories as the market situation keeps changing. For instance, if you make a certain investment in bonds, your next move should be to invest in something else.
This way, you minimize risks and if you incur the loss in one investment, there is the possibility to earn profits on the other one.
On the other hand, if you invest in only one thing, such as stocks, for example, you may lose all your money in one go if the market crashes. Instead, build a versatile portfolio with different asset categories and investments.
Making investments in different asset categories has a direct effect on your end financial goals. Poor management of investments can be a hurdle in reaching your financial goals. In simple words, your investment should be an equilibrium of varied categories considering all the risks involved and your hard earned money.
As the famous saying goes, ‘don’t put all your eggs in one basket’, therefore one should refrain from investing all their money in one place. This only increases the risk of heavy losses. It is therefore important to pick the right combination of investments which suit you and your financial situation.
This behavior has been noticed for shares. Individuals favor investing huge amounts on particular stocks. They miss out on the fact that if that particular company goes bankrupt, they may have to write off huge sums of money.
Create Emergency Funds
Financial advisers usually recommend that one should invest in a savings investment plan, which can shield you during an emergency. Sudden loss of a job, natural calamity, and unexpected illness can be some of the situations wherein you need money instantly, and at this point of time, an emergency fund can be of great help.
Some investors ensure that at least a sum of six months of their earnings is invested as emergency funds. This assures that they have a stipulated amount with them if the necessity strikes.
From a business perspective, it is essential to make necessary investments at the right time and place along with the subsequent amount of easily accessible emergency funds.
If you are a business owner, there is a high probability that you may need property finance for your growing business. In such a situation, it is necessary to consult a reliable and renowned source to help you before it’s too late. Remember, prevention is better than cure!
Rebalance your Portfolio
At times, investors have an imbalanced portfolio wherein they make heavy investments in one particular asset category. Although they may have a proper mix at the start, it’s like that an emphasis is being put on one particular investment due to the state of current markets.
Rebalancing your portfolio helps you to re-create equilibrium in your assets and will minimize the level of risk involved. There are two ways to rebalance your portfolio – one is time-based and the second is as per your investments.
The first method involves rebalancing your portfolio at an interval of six or twelve months. The main benefit of this method is that you are reminded to rebalance your portfolio at a fixed tenure without any delay.
The second method includes rebalancing your assets when the need arises. This is mainly when the number of your assets either increases or decreases. This is because the asset percentage exceeds or precedes a certain estimated amount. A significant benefit of this method is that you know when your portfolio needs to be rebalanced.
Consider Cost Averaging
There are various effective investment strategies and one of them includes cost averaging. This strategy prevents you from investing at the wrong time and for long intervals.
This will allow you to make regular investments at the right time instead of making wrong investments at the wrong time. For instance, cost averaging will ensure that an individual can make a retirement investment of a stipulated amount before the end of a financial year or right at the start.
There are some employers who offer retirement plans to employees. It is wise to make optimal use of this opportunity and invest in your retirement plan. You are likely to obtain a surplus amount with each contribution that your employer makes.
Lastly, it is important to avoid knee-jerk reactions to ‘fake news’ as they are mainly used as a ploy to lure potential investors. It is imperative to do your research and consult your sources before you actually invest.