Knowing the answers to these questions will help you start investing, as well as sleep better night after night.
So, you’ve got some cash set aside and want to start investing.
Hopefully you’ve made this decision with the help of a financial adviser, but you may have decided to go it alone.
Either way, there are three questions that you should be able to answer – honestly – before you start investing to build a strategy that’s appropriate for you.
1. What do you want to achieve?
Maybe you’re planning retirement, looking to fund children’s education or buy a house down the track. Whatever the case, set your goals and timeframe upfront because each of these scenarios have different implications for your investments, in particular the types of assets you invest in.
So when someone asks you why you’re investing, make sure you know the answer.
2. How much money can you afford to invest?
Most investments require a long-term commitment, tying your money up in assets that are not as liquid as cash.
So while it might seem like a good idea to put all of your money to work in investments, the reality is you can’t pay the bills with shares or a house.
Keeping a good balance between investments and liquid assets is crucial to get you through the day to day, while keeping one eye on the future.
3. How do you feel about risk?
All investments carry a degree of risk to justify their expected return to investors. Generally the higher the risk, the greater the expected return.
Just like some people seek out adrenalin-boosting adventures like jumping out of a plane, while others think twice before diving in the deep end at the pool, attitudes to investment risk vary significantly from person to person.
If your investments aren’t in line with your risk mindset, you could lose more than just your money. The stress takes its toll on other aspects of your life too.
So before taking the plunge, understand how you feel about risk so your investment decisions don’t keep you awake at night.