I have a problem with too much money. I can't reinvest it fast enough, and because I reinvest it, more money comes in. Yes, the rich do get richer. ~ Robert Kiyosaki
The dictionary defines "investment" as "to lay out money so as to obtain a return". It is probably hard to get a better definition because we can "invest" in such diverse areas as a good education, a new suit, the stock market, a holiday home or even in Exchange traded funds (ETF). In each case we are outlaying money -- and often time, in the expectation of some future benefit. But over here we confine ourselves to financial investment.
Investment are like horses, a different purpose requires a different breed. No one investment can be all things to all people any more than a child's pony can pull a plough or win a trophy. The right choice of investment is of extreme importance and when making it, the main thing is to decide what you are trying to achieve and how much you have to work with. Once you have worked out these two things, the major elements to be considered are taxation, inflation, rate of return and risk.
In helping clients understand where their money should be invested, a financial advisor usually say:
When you go out to eat there are three areas from which you are likely to choose your meal. They are meat (lamb, beef, prok), seafood (oysters, fish, crabs) and bird (chicken, duck, pheasant). On the investment menu you have a similar three choices -- cash, property and shares.
Just as a balanced diet may contain a selection from each group so should a balanced investment portfolio have an interest in the following:
- Cash in some form (such as bank accounts, debentures, bonds, mortgage trusts etc)
- Real Estate (either on your own or through property trusts and syndicates)
- Shares (either on your own or through such avenues as equity trusts and insurance bonds)
Everybody's investment needs are different. It is important that each investment plays its part in the overall picture an dthat the investment be emotionally compatible with the investor. Some of the major features to be considered are:
- The age of the investor -- a young person can take a risk, lose all and start again; elderly people must have absolute security.
- Investor's occupation -- People with irregular and uncertain income such as commission salespeople and casual workers should be very wary of any investment which requires a fixed annual or monthly payment.
- Does the investor wish to be actively involved with the investment or is it a passive investment, with no involvement at all, preferred?
- Does the investor have a nervous disposition that is likely to casue panic at any unexpected downturn in the market?
The golden rule of investment: The higher the expected return, the higher the risk
It is important that investors be educated enough to know when to take a small risk to get an excellent return eg. funds invested in a credit union or building society may be more at risk than if invested in a bank, but the overall risk is so low in any case that there is no reason why people should not use building societies or credit unions.
It is important to consider the amount of control you have over your investment and the degree of need for control will depend upon your personality. For people who like control, the two most obvious avenues are investment property where you buy and manage the property personally or investment in the stock market where you make the investment decisions yourself. It should be noted however, that most factors affecting the price of shares are outside the control of investor.
It is necessary to work out the term required. Investment basically falls into short term, medium term and long term.
A person never knows when there might be an urgent need to raise money for an emergency. A prime investment rule is never invest money on a medium or long term basis if the money may have to be withdrawn in a hurry. It is important to know how long it takes to cash an investment, what fees, if any, are incurred in so doing and whether investment can be liquidated in part.
5. Specialised knowledge
There are certain investments which require highly specialised knowledge above the skills of most people. These include gem stones, antiques, carpets, stamps and coins. There can be large profits in these areas for the small percentage of people who have the natural aptitude, the time and the dedication to acquire the necessary skills. These avenues are best left alone by most people.
Investment tools used to build wealth, might seem complicated at first, but once you get the basics, it's relatively easy. However, you need to know the right tools to use. Before you buy any investment, be it bonds or ETF, you need to fully understand what you are buying -- YourETF Guide: financial advisor and Online information for Exchange Traded Funds Investment.