Investing: back to basics

The past decade has shown the world that share markets can be volatile creatures and we are often asked “when is a good time to invest in shares”? While nobody knows what each new day will bring, the key to answering this question hinges on acknowledging three aspects of your personal financial circumstances:

  • your investment goals +
  • your investment time horizon +
  • your investment risk tolerance.

Investment goals

Understanding your investment goals can make all the difference to deciding whether to invest now or to keep your cash handy. Are your goals short, medium, or long-term in nature?

For example, saving money for a house deposit in a year or two is generally best kept in a higher interest savings account. However, if your goals are medium to long-term (say, five years or more into the future), then perhaps investing in the share market may be appropriate.

Investment time horizon

Being realistic about the intended timeframe for your investments is crucial to making a suitable investment choice. If you are looking for a short-term investment, the general rule of thumb is to keep your funds in defensive assets such as cash or bonds.

If you are looking to invest for the longer term, growth assets such as Australian and international shares and property may be more appropriate. Be aware that if you have a short-term horizon, investing in these asset classes is generally not recommended because there is a greater risk that you could receive less back at the time of withdrawal than what was originally invested.

Investment risk tolerance

Most people will say that the best investment is one that offers the highest returns. From a financial planning perspective this is only part of the picture. The optimal investment choice should take into account not only your goals and time horizon, but also your ability to tolerate investment risk.

Almost all aspects of investing involve risk. At one end of the spectrum, some people may be very comfortable with the ups and downs of having a portfolio predominantly exposed to shares and property. Others may prefer the stability of a portfolio oriented towards cash and fixed income securities. The risk associated with the latter is the impact of inflation, particularly after tax. A more balanced investor will have a mix of all of these asset classes in their portfolio.

All things considered, the best investment for you will be the one that you feel comfortable with, while providing for your financial needs.

If you are unsure about your next investment step, please contact us for personal advice.

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