One of the big takeaways from this space last year was that one of the most near-sighted things you can do, financially speaking, is to not invest. So on this first day of this new year, let's hit the ground running with laying the foundation to the investment course you'll want to chart for 2023. I don't know about anyone else but 2022 was not the post-COVID soft landing we were all hoping for, with inflation moving like Buzz Lightyear "to infinity and beyond!" Living was expensive! What made it even trickier was the instability of the markets being further impacted by the geopolitical environment. But here we are, having weathered all the ups and downs of 2022. Now is not the time to be passive and run from what is promising to be an interesting 2023.
So between catching up with your nearest and dearest, hopefully, you would have carved out a little time over the holidays to consider your current financial position and get a jump start on the new year. Did you know late December is a good time to pick up undervalued stocks? Take a look at blue chip companies that you want to hold for the long term. Let this be the year you transition from simply amassing cash in a savings account to becoming an investor in the capital markets. If you have already dipped your toes into the capital markets look to becoming a more adept investor by diversifying your portfolio. For those who have been in the equities and fixed income markets for some time, have you really sought to reposition your portfolio to include alpha type returns?
The new entrant
Does this new year find you in the same position as you were at the beginning of last year? Have you vowed that this will be the year that you put fear aside and begin to invest? However, you haven't made a move towards your financial goal, frozen into inaction because of a fear that you could lose your money?
Fact is: Keeping all your money in a savings account that earns you little interest presents a different kind of risk to you losing your money. By not investing, and simply parking your money in a savings account, you are unwittingly not taking into account that inflation can and will burn a hole through your savings, effectively and significantly reducing the value of your money in the future when you need it. The value of the $1 million you have saved in that account won't be the same in five years' time; as a matter of fact with double-digit inflation in one year you are already at a loss.. Think of it this way: $1 million dollars to your grandparents back in the day didn't have the same value as it has today. As a matter of fact, they probably had no hope of seeing that kind of money in their lifetime! So that's the risk of not investing. This is not to say you can't have cash in the bank at all. But by keeping all your money in a savings account, you are foregoing potentially better returns that you would see on investments, especially an investment portfolio that's diversified across asset classes, industries and even geographical locations.
Let's say a few years ago you bought shares in a company that everybody said was doing well. You researched it, and, yes, it's doing well. You put a significant amount of your savings in this company and moved on with your life. You're now a shareholder, and that's the extent of your investing story. You're in your thirties; you played the stock market for long-term gain. You have all the time in the world for your returns to grow.
But then, God forbid, there's a storm brewing for this company; let's say the market gets erratic bringing about a downturn, and all the shareholders' fortunes are about to change. This is why you shouldn't have invested all your money in one single security. Everything is smooth sailing whilst the stock's performance is good. But in the event of an unforeseen U-turn, you could stand to lose your entire investment. In the words of that pop cultural icon of style Carrie Bradshaw: Just like that.
How to get started
For either of these positions, you need to come up with an investment strategy. An investment strategy is a plan that guides an investor's decisions to reach their financial goals, one that aims to balance risk with reward.
There are many different types of investment strategies that can be employed, depending on a variety of factors, including the investor's age, financial goals, risk tolerance, available capital, and expected returns, amongst other things. Before you make any investment moves, the aforementioned considerations must be determined, as they will help you to identify the kind of investments best suited for your specific needs.
The investment strategy for a 30-year-old professional may not be the same for someone closer to retirement age who might have more available capital but a shorter investment horizon or length of time an investor intends to hold a security. So, when taking into account age when formulating their portfolios, for example, these two investors would need to decide: Do you follow a low-risk, more conservative strategy where the focus is on wealth protection? Or do you go more aggressive, where you seek rapid growth by focusing on capital appreciation?
Next Week: Types of investment strategies