If 2019 is going to be the year you finally start investing, what key factors do you need to consider?
In this article we've outlined four steps towards setting investment goals for 2019, or as we’ve coined them: the “TART” method.
Time: How long are you willing to invest for?
The first consideration when setting your investment goals is how long you are willing to invest for. Are you in for the long run (more than 10 years, let’s say) or do you want to achieve a short-term return?
Setting a clear time horizon for your investments can help you to decide which assets you should invest in.
For instance, if your goal is to make a short-term return, investing in real estate may not be the best choice as it can be very illiquid (not readily convertible into cash) and returns are usually realised on a more long-term basis.
Of course, returns aren’t guaranteed and there are risks with any investment, but real estate investing has traditionally been associated with a longer-term strategy.
Having a clear timeframe for your investments and how long you are willing to wait for returns can be the first step towards deciding your asset allocation.
Access: How soon might you need the money invested?
In order to set your investment goals you also need to understand your liquidity requirements. What we mean here is: how quickly do you need to be able to convert your assets into cash?
For instance, if you need a large portion of your portfolio to be easily accessible, you may decide to simply hold it as cash in a savings account. Cash is the most liquid asset.
Whereas, if you already have enough cash to meet your upcoming expenses and you can afford to invest longer-term you may choose, for example, bonds with a set maturity date.
Bonds are what’s called a fixed-income investment where investors loan to an entity such as a government or corporate. The maturity date is when the sum must have been repaid in full.
Land and real estate or property are usually considered the least liquid investments.
Understanding your liquidity needs can help you to decide how much you are willing to invest, your asset allocation and whether you have access to the cash you might need.
Risk and return
Next you need to evaluate your personality and your appetite for risk.
You can find out more about your appetite for risk using InvestIQ, an investment IQ test designed by Schroders to help investors understand their biases.
How would you feel about losing the principal amount invested? You should always make sure you have enough money left over to cover your day-to-day expenses, but this is about people having different attitudes to what they do with their spare cash.
More risky investments generally correlate to higher returns, although nothing is guaranteed. Once you have decided your risk tolerance you can explore which assets to invest in.
For example, equity crowdfunding in start-ups tends to be considered high risk while cash in savings or current accounts is considered to have a low risk profile.
Remember there is no such thing as a no-risk investment and the value of investments and the income from them may go down as well as up and you may not get back the amounts originally invested. Even money in savings accounts risks losing value in real terms because of inflation.
One way to manage risk is to spread investments across different asset classes. This is called diversification.
Target: What are your financial targets?
Once you have considered your time horizon, liquidity requirements and risk preferences you need to set a clear and measurable target.
What are you putting money aside for? Are you investing to eventually buy a house? For retirement? For your dream car? Or saving just for emergencies?
Here are some tips on setting a target:
1. A target should be measurable – A good way of doing this is to decide on a set amount to save or invest every month. For instance, you could calculate your income less your monthly expenditure (plus a buffer for unforeseen expenses). Set a percentage of the remainder which you wish to invest each month.
2. A target should be realistic – The amount you invest each month needs to be affordable and not put you under unnecessary financial strain. You should not be investing 100% of your monthly income and have nothing left over for your living expenses!
Are your financial targets feasible given your timeframe, liquidity requirements and risk tolerance? Consider the points above and ensure that your target is achievable. If it is not, consider adapting your timeframe or risk level.
Deciding the "TART" for your investment portfolio can help set clear goals and targets when you begin your investing journey. Happy New Year and new investing!
You should seek advice if you are unsure if an investment is right for you. Opinions included in this article should not be construed as advice or recommendation.
View the original article on MoneyLens. MoneyLens is a website aimed at helping millenials manage their money.
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