AS we enter a new year and make our resolutions, many people make a commitment to get in better shape, quit smoking or eat healthier. While those are important aspirations, have you considered goals for your investments?
We should all include out finances in our resolutions.
Making financial resolutions now and implementing them can lead to future stability. One of the greatest misbeliefs is that you need to have large sums of cash to invest.
The reality is the opposite, as there are investment options available to the investor which do not require large capital outlays. The first step is to identify what your objectives are.
Expectations are important, as it plays a critical role in finances. The more you know, the more realistic your expectations will be, and the better your chances for success.
Each person has the desire to become wealthy and some spend their entire lives trying to accumulate wealth, but never succeed. Investing is usually a necessity for people who want to become wealthy. In order to have any chance of getting ahead financially, and eventually becoming wealthy, two important strategies should be adopted: eliminating/reducing debt and budgeting.
Reducing debt is important as it allows you to have excess funds to invest. If you have a lot of debt repayments, then you are really giving your money to others instead of keeping it for investment purposes. Planning and controlling your spending is vital; creating a spending plan will allow you control over your money. It is imperative to spend less than you earn, as you will have excess funds to deal with financial emergencies and to invest, eventually building wealth.
For individuals who are investing for the first time, it is important to consider the following basic rules of investing.
The first rule of investing is understanding the relationship between risk and reward. The higher the potential reward, the higher the risk. This is a great way to evaluate potential investments. If you are a conservative investor, you should not be involving yourself in speculative investments as they carry a high degree of risk.
With investments one of the following can occur due to changing market conditions; the asset may go up, down, remain the same, or become worthless.
Secondly, you must have an emergency savings account. Any funds set aside for emergencies must be kept in a regular bank account or a liquid investment instrument for easy access. It is not recommended to use emergency savings for investing.
If you were to invest your emergency funds, and the investment goes down, or becomes worthless, then you will find yourself in a serious position. You may have to pull funds out while it is down in order to take care of emergencies. If that happens, you are pulling money out at a loss which is not a smart investment strategy.
Next, never invest money that you cannot afford to lose. Only utilise funds set aside specifically for that purpose. Funds intended for other things such as meeting day-to-day living expenses do not qualify. With the possible exception of real estate investing, borrowing money to invest is not recommended, as it is very common for investment ideas to underperform or to fail completely. If you borrow money to invest, it is possible you could end up paying back funds years after the investment failed, and this can be a huge setback.
Another important rule is diversification. Diversification is a portfolio strategy designed to reduce exposure to risk by combining a variety of investments such as stocks, bonds and real estate, which are unlikely to all move in the same direction at the same time or at the same rate. The aim is to reduce risk and volatility in the portfolio.
Developing and practicing smart investing strategies is critical to in enhancing your chances of achieving your goals. Another of the most important aspects is to a have a basic understanding of the financial products in which you are investing. Also, determine how much risk you are willing to take, do regular research and learn the associated costs of investing.
For the average investor, this can be a tedious process, and in most cases will require expert advice. Investment companies provide expert advice to their clients through financial advisors, usually at no additional cost. Financial advisors provide clients with guidance on financial matters, making recommendations on ways to best utilise their money. The role involves researching the marketplace and counselling clients on products and services available; ensuring awareness and understanding on those that best meet their needs.
Globally, 2012 was a difficult and stressful year for investors. The uncertain global situation and constant negative news caused volatility in the markets which had a major impact on investors' returns. There is no precise prediction of what will happen in 2013, or in the distant future, however, based on current market conditions we can make decisions on how to manoeuvre in the short term. Speak to a financial advisor to create a tailored road map for potential success in 2013.
Patrick Robins is a Wealth Advisor at Stocks & Securities Limited and can be contacted via email@example.com