“Know thyself” was a phrase placed over the oracle of Delphi in ancient Greece. It is a phrase that is just as relevant and insightful when designing your investment strategy. The more you know then the better you will be able to design a strategy that fits your unique needs. We will be covering certain factors you must know before you make a decision to invest money. These are the following factors: Time Invested, Risk Tolerance, and Investment Goals. We will discuss each of these one by one.
Knowing and understanding “Time Invested” means that you know how long you will be able to invest the money that is under consideration for investment. For example – let’s say you have $3000 that you are considering investing. The first thing you must ask yourself is what you will end up using that money for at the end of the investment term. For some situations this will be clear. Many people invest for college. If this is the case then we can determine the “time invested” by gauging the age of the children now and determining how many years it will be until they enter college and the money will be needed. The end result of this calculation is the “time invested”. The longer or greater this number is then the more risk that can be assumed with the investment. This is the first question to ask yourself about a particular investment.
Risk tolerance is the next factor that must be understood. Risk tolerance recognizes the fact that certain people have an aversion to risk and will suffer psychological consequences for having their money in certain riskier investments. Because of this there are some investments that are simply not appropriate for certain personality types. If you are one of these people then you should probably avoid the riskier investments. Understand how comfortable you are with risk and how comfortable you are with seeing the value of your money go up and down on a regular basis. For some this is not an activity that is conducive to peace of mind. Peace of mind should be your first goal in any activity, so avoid anything that disrupts your peace of mind.
Investment Goal is the next factor that should be considered. Investment goal is important because it tells us what kind of return we need to receive on a particular investment. If we have a certain amount of money to invest and we know that our goal is to use it to fund a house purchase then we have an idea of how much money we need to have in the end to make that goal a reality. Then it is a simple calculation to determine at what percentage that money needs to grow to meet that end goal. This tells us the rate of return we need to get on our investment and it will help lead us to the appropriate investment choices.
Reviewing and knowing your situation in terms of the three factors stated above will help you to make an appropriate investment choice. If you ignore these three factors then you will end up with an investment that is not appropriate for you or at worst completely wrong. The more you understand your unique position, the more you will understand the decision you need to make regarding your investments.
Information is for educational and informational purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.