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By Tadiwanashe D Chiketa
WHEN choosing an investment, a one size fits all strategy does not work. Investments are like shoes, you do not buy a shoe because it looks good on someone. You have to find one that fits you perfectly, one that you know looks good on you.
Investments should be specific to individual needs and this article is going help you find the shoe that fits your Cinderella.
- Always start with the end in mind
When looking for an investment that best suits you, it is wise for you to start with the end in mind. Map out your plan, know what you want to achieve, when and how you want to achieve it. This will, make the whole process easier for you and it will give you a clear pathway to follow.
The end could be retirement for some, you should know at what age you want to retire and how much you need on your retirement. This will help you in choosing an investment because you will know how much you need to make before retirement or how much you need to put aside right now to achieve your goal or target. You can start investing in dividend paying stocks right now so that you will have a source of income when you retire.
For others, the end could be buying a specific model of a motor vehicle at the end of two years. Knowing what you want will help you choose an investment that gives you returns that will get you that car after two years. If you want to invest in your children’s future, maybe so that you won’t ever have to worry about tuition, you will know how much you need to put away each month so that you reach that target by the time your children start school.
- How much do you have to invest?
This is very important because the money you are willing to invest now forms the core of your whole investment. For some investments, you need a large initial capital whilst for some, you can start with smaller monthly contributions. Knowing how much you want to invest gives you a guideline on the type of investment you are going to start on.
You need to be able to afford the certain type of investment you want, and the money you are willing to part with today will determine if you can afford that investment. If you want to start on real estate you obviously need a lump sum to pay for the deposits on the property and other direct costs that could be associated with the property. You might need to renovate and remodel the property before you start renting it out or selling it, so it requires a huge start-up capital.
If you want to invest in stocks, for example, they give you the flexibility to put in regular smaller contributions compared to real estate. So, you have to know how much money you’re willing to invest, then it will be easier to choose an investment plan that suits you and your money.
- Time horizon
Knowing how long you want to invest in an asset or security will help you choose the best investment that follows the timeline you want. There are investments for the short term and some for the long term and you need to decide between the two which will guide you to the investment opportunities available.
If you’re looking for short term investments, then you can start looking at the money market instruments (treasury bills, CD’s) or other side businesses that generate returns in the short run, but for long term investments, the capital market(stocks) or real estate industry is another way to go.
- Know yourself
It is important to know what kind of investor you are before you start picking on any investment. Are you risk averse or do you thrive on taking risks? Are you patient or your patience runs out quickly? These are some of the questions you should ask yourself before picking an investment plan. No other person, not even the best financial advisors can answer these questions for you. You’re the only one who can answer these questions because you know yourself best. Knowing what kind of investor you are will guide you to the types of investments you should make.
There are high risk investments in the market and if your risk tolerance is low these will definitely not work for you. You should pick investments that align with the type of investor you are, investments that suit your investor personality. A lot of investors are left crying because they do not take time to know themselves and understand the type of investor they are, instead they just follow what the next investor is doing hoping for the same results. All investors are different and knowing yourself helps you pick the best investment, it also helps an advisor to help you in picking investments with you.
- Be prepared to lose
YES, you heard me right. You should be prepared to lose. No investor or group of investors can outperform the market, never! Every great investor you see out there who has made it has failed at some point and lost money through an investment. This does not mean when you lose you give up and walk away. When it comes to investing, losing money is one of the best things that can happen to you. You learn important lifelong lessons and you will never repeat the same mistakes. If you lose, you will know what works for you and what does not.
You should know that with every investment, there is a possibility that things may not go according to plan or analysis. Knowing this will help you deal with loss when you eventually experience it. Being a great investor doesn’t mean you don’t lose, it means you win more times than you lose and loss is part of investment. Investing is taking a risk and the possibility of an unfavourable outcome is there no matter how good you are. You cannot start investing until you are prepared to lose. Taking great precaution and doing your research before investing will help in minimizing losses, make sure you take great precaution. Always take losses as lessons.
Knowing these important things before you start investing will assist and guide you in choosing the best investments for yourself. Investment advisors are there to guide you, but no one knows you like you do. An investment advisor works with what you give them and that is how they help you choose a plan suited for you. If you know the things above, you will realize investing is actually fun and doable.
Donald is a final year Banking and Finance student who has interests in Finance and investments. He is a member of the Junior Chambers International
This article was first published the December Issue of The Entrepreneurial Magazine
