3 Factors which determine your investment strategy
You may be wondering what is the right investment strategy for you, but without knowing anything about you, any advice on which investments are right for you may in fact be the wrong ones. There are basically three factors that determine which are the right investments for you, they are:
1. Your age
2. Purpose for the money
3. Your risk profile
Starting with your age. It would be rather silly of you to invest all your money in growth funds if you are aged 65 because if the market takes a dive such as was the case during the 1987 sharemarket crash and to a lesser extent, the Global Financial Crisis during the early 2000s you have less time to recover from these setbacks whereas the young ones have time on their side.
The purpose for the money is the second factor.
Decide whether you require the money in the short-term, medium-term, or long-term.
Short-term would be up to a year.
Medium-term is 1-5 years
Long-term is longer than five years
Short term expenses would be, a bank account for emergencies, a holiday within a year, dental expenses, or t pay for the kids schooling for a year.
Medium-term would be savings for a car.
Long term would be your retirement fund, saving for a house deposit, or saving for the trip of a lifetime.
Your risk profile is a determining factor in where you invest your money. If the thought of the sharemarket taking a dive will give you sleepless nights then investing growth stocks in the sharemarket is not for you. A better option would be managed funds where you will be given a choice between growth, balanced, and conservative funds.
It is important not to get into debt for there is a cost to debt and that is interest. Interest adds to the cost of goods bought with borrowed money, and this adds up to a fortune during a lifetime of borrowing for consumables. This is called bad debt because the value of the item declines over time.
There is such a thing as good debt though and this is your first home because the value of the property increases during the lifetime of the loan but even this is not always a good option for some people if you live a kind of transient lifestyle.