Tag Archives | investment strategy

It’s About Time

its-about-timeIt’s About Time

It’s about time, or, to be more precise, it’s mostly about time. That is the answer to the question on most investors lips, which is ‘How should I invest my money?’ The next question to ask should be ‘How long do I want to invest my money for?’ Your investment time frame is one of the key ingredients in deciding how best to invest your money. The problem is, many inexperienced investors don’t understand the connection between time and investment.

Your investment time frame is the time after which you will need to access the amount of money invested in order to spend it. This is not to be confused with the time after which you will need to spend the income from the money invested. Many people approaching retirement have the mistaken belief that their investment time frame ends at the age of retirement. If things go according to plan, you will still have money invested the day you leave this earth. That could be thirty or so years after you retire. Your money will be mostly used up, but gradually. While every dollar you spend has a different investment time frame, it is more practical to consider three investment time frames – short term, medium term and long term. Money allocated to each of these time frames should have a different investment strategy. Money required in the short term needs to be invested mostly in stable assets, despite the lower return, to avoid the risk of loss. Funds for the longer term should be invested in assets which will grow, albeit with volatility, to get a good return. Funds for the medium term should be a balanced combination of the two.

Investing in this way gives the opportunity for a good return while making sure funds are available when required.

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Focus on the Horizon

Focus on the Horizon

When I was young, I used to go fishing with my father in his boat. Not being much of a sailor, I often succumbed to the motion of the waves when there was a big swell. All I wanted to do then was to get my feet back on firm ground. I still remember the advice my father gave me to help me last the distance back to land. He would tell me to focus my eyes on the distant horizon. By looking at a steady point far away, the ups and downs became tolerable and, after plenty of practice, I didn’t even notice the movement. Now, as an investor, I find I can use the same technique when markets become volatile. The horizon on which I must stay focussed is my ultimate investment goal and if there is no good reason to change it, then the short term ups and downs should make no difference to my investment strategy.

 Markets move in cycles and as surely as the sun will rise every morning, markets that have dropped will rise again. The value of a diversified investment portfolio will move in waves that fluctuate within a band on either side of a long term trend line; never reaching either infinity or zero.

 Share prices are driven by two major forces; market sentiment (fear and greed) and market fundamentals (economic and financial performance). Market fundamentals set the upper and lower limits of value, while market sentiment is the driving force between the upper and lower limits. When the market drops, it is time to look for bargains. There are opportunities to make long term gains by investing in markets and companies that have solid economic and financial prospects, and which will experience a rise in price when the market sentiment changes.

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When Sharemarkets Fall

When Sharemarkets Fall

It’s easy to invest when markets are running smoothly but when they fall your confidence can be sorely tested. More uncertainty in investment markets means more volatility and a need to review your investment strategy. Here’s what to do:

 

Start with the basics. Focus on your goals and objectives. If you have long term investment goals, remind yourself not to get too distracted with short term changes in the market. Reversing your strategy will cause you to lose value and lose time – both key ingredients for achieving your goals.

 Review your attitude towards risk and reassess whether your investment strategy is a good fit for your risk tolerance. When things are going well in investment markets it is easy to take on more risk than you should. Find the right balance between risk and return so that you can achieve your goals while taking an acceptable level of risk.

 Stay diversified. Markets can change quickly, and moving all your investments into one asset class might work in the short term, but it means you are taking on more risk by having all your eggs in one basket. Don’t sell in a panic or you will crystallise any paper losses. Selling up and putting all your money into very safe investments will lower your return, possibly making your goals harder to achieve.

 Evaluate all the options you have. This might mean getting more information from an expert who you trust. Make sure that any advice you get is from someone with a balanced or independent point of view who can point out the downsides as well as the advantages of different investment options.

 Confident investors have a long term plan that they stick to, they do their research, they aren’t swayed by emotions such as fear or greed, and they are successful at building wealth 

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