Investing Terms for the Beginner Investor
A number of days ago we posted a blog with tips and terms for the beginner investor. Today’s blog is more of the same as well as some important questions and some good advice. Enjoy.
Here’s an big question; what sort of investor are you? (This one’s a biggie, so pay attention.)
Conventional wisdom would tell you that, once you are personal and financial goals were identified and you’d figured out exactly what amount of funds you had available to invest, you’d have to identify what kind of investor you are. We believe similar but that it should be in reverse. First determine what kind of investor you are and then, based on that type and the commonalities of such, go forward with your financial activities and plans.
Every investment type, no matter what it is, carries a certain amount of risk. The type of investor that you are will help to determine the amount of risk that your willing, and able, to take with your money. Since very few people become adults with excellent knowledge of how to invest, talking to a well-educated, street smart financial advisor will probably give you a lot of information and insight. Some of the questions below are ones that you definitely should ask when you first meet (and ask yourself as well);
· How much money do I actually need to earn and invest to reach my financial goals?
· What type of information can you give me that will allow me to learn about financial markets myself?
· How much risk are you willing to take in order to have a higher chance of getting a better return on your investment?
· Are you Interested in short-term or long-term investments and why?
What exactly is the relationship between the terms ‘risk’ and ‘return’? (And do you have any of the juicy details?)
If investment terms were building blocks, these two would be at the foundation. Closely correlated, risk and return are the foundation of investing. When you invest in something that has a higher risk you can, if things go right, be assured of higher returns. Of course, if things go wrong you may also lose your shirt. Something that’s low risk might mean that you make less returns or have to wait longer to get good returns, but you also won’t find yourself in the poor house if things go south.
These two terms, and understanding them completely, are the fundamental building blocks that will allow you to build, and achieve, any investment and financial goal that you might have. Understanding risk, as well as your personal risk tolerance, will weigh heavily on any decisions that you make when investing.
Asset Classes? Do they have those at night?
When you make an investment it will undoubtedly fall into one of the 4 main asset classes that are available, including cash, property, shares and fixed interest. Every asset class has its own level of risk and thus its own level of return as well. Determining which of these 4 asset classes to invest in (and experts will tell you that you should have some in all 4)is probably one of the most important decisions you’ll make as an investor.
1. Cash is the term that’s used for investments that are very short-term including deposits as well as treasury notes. Considered to be the least risky of the four major asset classes, cash provides little chance of capital gain and is generally used to provide investors with an income stream, however small.
2. Fixed interest investments, also known as bonds, are basically what amounts to loans that investors provide to either private corporations or government entities. What they get in return is interest on the money that they paid, delivered to them over the life of the bond that they purchased. These are generally used by investors to provide a regular income stream and carry a low to medium-size risk. In most cases however they are higher than the earnings that cash investments will make.
3. Property, including residential or commercial or through a Listed Property Trust (LPT) is what they call a ‘growth asset’ and it takes advantage of the fact that land and buildings, generally speaking, increase in value over time. Since it’s a growth investment, over the long term you can generally expect capital gains as well as an ongoing income stream from rental money. As opposed to cash and fixed interest, property is perceived to be moderately volatile and as such delivers, in some cases, a higher return.
4. Shares give you part ownership of the company and, as a shareholder, there’s the possibility that you will be paid in dividends if the company whose shares you own is successful and profitable. Shares can go up in value over their lifetime, sometimes many times, and can be sold, with a capital gain if you’re lucky, at a specific time in the future. The attraction for shares is that, in most cases, they far outperform any of the other three major asset classes in the long run. The downside is that of all 4, shares are definitely the most risky.
A good financial advisor will tell you that diversifying your portfolio and investing at different levels in all four of the major asset classes is one of the best ways to protect your money, your investments and your future earnings. If your funds are generously spread among the different asset classes the risk of losing everything is greatly reduced as, at least statistically speaking, it would be almost impossible for all 4 of the major asset classes to severely drop at the same time. (That would be what experts call a ‘really bad time’.)
If you have any questions about your your finances, investing, terms or money in general, please let us know, ask us any questions you have and we’ll be sure to get back in touch with you ASAP.
Filed under: Investing
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