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Firstly, it is important to set out your
investment goals, i.e. what is the objective of the investment.
Analysing the investment objectives will help
determine the most suitable types of asset for reaching this
goal. Consideration must then be given to the following:
Risk – It is
inextricably linked to return, and generally the more risk with a
particular investment, the greater the return expected. The
majority of investors consider themselves to be somewhere in the
middle of the risk spectrum, i.e., between risk averse and risk
taker. It is really only through experience that many establish
what tolerance for risk they have.
Expected return – Investors will generally
expect to get the best return they can, for a given level of
risk. The key is to be realistic. On the basis of long-term
historic performance figures, the return for each asset class will
differ.
The mantra ‘past performance is not a guide to
future returns’ may ring a little hollow, but a more meaningful
measure is return per unit of risk.
This combines risk and return and allows you to
compare investments between asset classes.
Time – Before
investing you should be clear about the time horizon for which the
investment is being made. Certain investments (e.g. equities) are
not suitable over the short-term. Often the investment objective
will determine the duration – investing for education on behalf of
young children is long term, whereas investing for deposit on a
house would typically be more short term.
Access – A
requirement for short-term access to funds would steer you in the
direction of liquid investments like deposits (which offer greater
access). Some investments offer unrestricted access to funds,
while others can be relatively illiquid.
The requirement for an income is also an
important consideration, which would fall into this category. The
investment goals established at the outset will determine the need
for access.
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