Whether you are a new investor or have an established portfolio, investing in any area can be scary and confusing. There are many different ways to invest your money, but how and where you do depends on many factors. The one term that encompasses all these factors is risk tolerance. When investing, you always need to ask yourself “what’s my risk tolerance?”
There are 4 key factors when analyzing your risk tolerance.
1: Your investment time frame
This may be the most broad factor, but it has rung true for most investors. the main logic behind this is the more time you have to invest, the more amount of risk you can afford. Say an investment goes south while you are still relatively young. You have a greater amount of time to make up for this loss compared to a person a little older. However, like I said before, this is a very broad rule and further considerations are needed to decide which investment is right for you.
2: Your Risk Capital
The amount of money you actually have to invest may seem like an obvious factor, however it may be difficult to know just how much of your capital you should invest. For the most part, savings should always come first before you invest. As a general rule, your savings should be enough to cover all of your personal expenses, such as your mortgage, loan payments, insurance, utilities, food, etc. for at least six months.
3: Your investment experience
How much experience you have with investing is crucial. People who have been investing for some time have a better grasp on good investments versus bad ones. In that case their risk would be much lower. For someone just entering the world of investing, there are many different avenues which can seem daunting. While first starting off, it’s typical to keep your investment capital low in order to minimize your amount of potential loss.
4: Your investment objectives
What you are investing in is a large consideration for what you should put your money into. For example, if you are planning to invest for your retirement, a low risk investment option might be the best option. If you have some expendable income, or have saved specifically to invest, you might be able to afford a potential loss without hurting something like your retirement plan.
When it comes down to actually investing, there are many different avenues to choose from. Some hold high return potential with high volatility. While others are more conservative and offer a safer option that’s less volatile. Some of the main forms of investments are:
Cash isn’t a very lucrative investment. However, the benefit of cash is its high liquidity. It’s a very smart idea for all investors to keep a good amount of cash at the ready, in case of emergencies. It forms the basis of the modern portfolio approach to investments. The downside to cash deposits are the interest rates. In fact the larger the cash deposit the lower the interest rate return. For someone with a higher yield access account (generally upwards of €50,000) can only expect an interest rate of .01-.05%. If you’re not looking for huge returns on savings accounts, then that might not sound too bad. Yet, if the current inflation rate in Ireland is right around .7%, your spending power on your savings will decrease.
Investing in equities (or stocks) has proven to produce some of the highest returns. They do come with a major drawback in volatility despite that. given enough time investing in a diverse range of stocks will provide a relatively high yield. New investors to the market would be wise to get good financial advice from a reputable broker. As I just said, diversification is key to minimize the risks involved in any investment and there are numerous ways to spread the risk in your portfolio. By investing in many different industries, you spread out your investment. If one area of the market where to crash, you would have other investments to hopefully cover the loss.
Bonds are essentially long term loans to corporate bodies or to Governments. Governments issue bonds to raise funds to pay for the shortfall of money in the economy and to pay off more expensive debt for cheaper debt. During the financial crisis Treasury bonds were being issued with coupons of €12 on a €100 bond. Coupons are the annual interest you get paid for owning a bond. These days some treasury bonds have a negative yield. The National Treasury Management Agency (NTMA) are responsible for issuing treasury bonds in Ireland. Over time bonds sit below equities and property in terms of returns, yet are a very stable investment. Bonds are highly liquid and provide good protection from inflation. They are also more popular when interest rates rise as investors move out of equities.
There are lots of ways to invest in property. You can buy a property directly and rent it out. In this case you are getting an income from the rent you are receiving and in the longer term you are hoping for some capital appreciation on your property. Eventually, if you hold the property long enough, the rent will make up for the high overhead cost of a building or property. This can be a risky approach as property prices could drop. Also you need to pay tax on some of that rental income so careful consideration needs to be taken before jumping into the landlord business. Along the same lines as becoming a landlord, many have found flipping houses to be a lucrative business. Flipping properties requires great business skills as well as construction, interior design and many other skills. Or a lot of overhead to pay people to flip it for you. Another way to invest in real estate to use a broker to invest in a property investment firm. These firms invest in commercial and residential properties and normally have a large number of properties in their portfolio. These Real Estate Investment Trusts (REITs) tend to outperform the regular stock exchange. Hibernia REIT located in Dublin has seen a 24% increase in its stock price since its IPO in 2013. History shows however, that the real estate industry can be very unpredictable and any investment in real estate should be heavily considered.
There are endless opportunities to invest in something that you and others deem as valuable. Valuables such as gold and silver have been a currency for centuries and remain highly sought after. You can even buy gold equity for around €1,460-€1,500 per share and silver equity for roughly €17-€18 a share. Other alternatives include things such as stamps, coins, vintage and model cars, comic books, sports cards, shoes and many more. These types of investments are more risky, and can be very volatile. Collectible and other alternatives can also produce the highest yield when done right. When considering this form of investment, just remember to be careful because they are generally only traded by professional investors and experts in the field.
There’s no wrong answer when deciding to invest. It all depends on what you are looking for and your risk tolerance. Even professionals make mistakes. Whatever you decide to invest in, do your research and invest in what you believe to be the best option for you.